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Canadian Life and Health Insurance Association Inc. Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:
Submission on "A Consultation Document for the 2006 Review of Financial Institutions Legislation"
To the Department of Finance
Canadian Life and Health Insurance Association Inc.
Table of Contents
The Canadian Life and Health Insurance Association (CLHIA) appreciates this opportunity to provide input as requested by "A Consultation Document for the 2006 Review of Financial Institutions Legislation".
The CLHIA, established in 1894, is a voluntary association with member companies which account for 99 per cent of Canada's life and health insurance business. The Canadian life and health insurance industry:
- provides products which include life insurance, disability insurance, supplementary health insurance, annuities, RRSPs, and pensions.
- protects about 23 million Canadians and about 20 million people elsewhere in the world.
- makes $44 billion a year in benefit payments to Canadians.
- manages about two-thirds of Canada's pension plans.
- has almost $315 billion invested in Canada's economy.
- provides employment to about 118,000 Canadians.
The structure of this submission is as follows: Part II presents the industry's perspectives on the issues raised in the Consultation Paper that relate to life and health insurers; Part III suggests some other possible amendments to improve the Insurance Companies Act (ICA); and finally, Part IV sets out some concluding comments.
Annex "A" of the submission provides a brief overview of the industry's role in Canada's economy.
II. Issues Raised in Consultation Paper
1. Disclosure and Complaint Handling Procedures
With respect to disclosure relating to products and to complaint handling procedures, it is important to note that, for life and health insurers, disclosure in relations to products and complaint handling procedures are regulated and supervised by the provincial/territorial Superintendents of Insurance. Indeed, both of these areas are currently the focus of ongoing work with the Superintendents.
With respect to product disclosure, provisions dealing with disclosure have formed part of provincial/territorial Insurance Acts for many years. In December 2004, the life and health insurance industry announced a customer information and confidence initiative adopting five measures to ensure that customers continue to have the information they need to make the best choices for themselves and their families. These initiatives are described in Annex "B". One major component was the adoption of the new Product Disclosure Guideline (Guideline 1) which establishes standards for information about the product to be made available to consumers. It applies to all individual life and health insurance products except Individual Variable Insurance Contracts (IVICs) and Travel Insurance, both of which are covered by their own Guidelines. Summaries of these Guidelines can be found in Annex "C".
With respect to complaint handling, all life and health insurance policyholders have access to consumer recourse through the companies' own consumer complaints protocol, as well as through CLHIO (and CFSON). Complaint-handling is also a focus of current joint efforts with the Superintendents, including, for example, the industry's current work with FSCO and AMF on the implementation of their harmonized complaints reporting system.
At present, there are already several provisions in the ICA which address product disclosure and complaint handling (see, for example, sections 486, 486.1, 487 and 489.2 for domestic companies, and sections 604, 604.1, 605 and 607. 1 for foreign companies). These are "consumer provisions" under the Financial Consumer Agency of Canada Act. When one looks at these provisions in the context of the significant other protections that already exist in this area by virtue of the provincial/territorial Insurance Acts, the Superintendents of Insurance and the industry's initiatives, it becomes clear that customers have access to both appropriate product disclosure and, if necessary, to readily-available consumer recourse mechanisms. Accordingly, it also becomes clear that the existing ICA provisions are more than ample to address any issues that may arise in this area and need not be modified in any way.
With a view to increasing efficiency, the industry strongly endorses efforts to simplify and streamline the legislative and regulatory framework generally. The industry stands ready to work cooperatively with the Department of Finance and OSFI on streamlining initiatives, including such initiatives in relation to approvals for routine transactions, as suggested in the Consultation Paper.
Moreover, the industry also suggests that the following additional changes to the ICA, which would contribute to streamlining, be undertaken:
ii) simplify the ICA by removing from the ICA and placing into OSFI guidelines the detailed rules governing reinsurance transactions that are not entered in the normal course of business (sections 254, 255). In addition, the scope of the requirement for Ministerial approval of transfers of policies should be narrowed.
iii) simplify the legislative/regulatory framework for reinsurers, who do not deal with retail customers but rather only with other regulated financial institutions, by:
b) exempting reinsurers from the application of the Financial Consumer Agency of Canada Act.
v) in the same area (i.e., triennial solicitation), simplify the requirement that policyholders must communicate their preference through completion and return of a form provided by the insurer by permitting policyholders to either do this or to indicate their preference in any other manner acceptable to the company [ss. 143(1.5) and (1.6)].
vi) amend the ICA to permit execution of proxies by electronic means (section 164.01).
3. Commercial Activities
At this time, the industry has two specific suggestions in this area:
ii) In order to reduce constraints on commercial investments by insurers, expand the scope of the asset transactions test in section 512 of the ICA. (The current restriction applies to one or more transactions in a 12-month period with the same party involving asset transaction with a value in excess of 10 per cent of the total assets of the company.)
III. Other Possible ICA Amendments
1. Compliance Self-Evaluative Privilege
The life and health insurance industry recommends that a compliance self-evaluative privilege be enacted into law for effective risk management. In an encouraging development, British Columbia has recently put a provision into place under its Financial Institutions Act which addresses this important issue to a limited degree. Self-evaluative activities are an integral part of OSFI's supervisory framework. Such a privilege would help insurers to better manage their reputation risk.
Enactment of a compliance self-evaluative privilege would have many benefits:
- Consumers would benefit from greater scrutiny of company compliance with laws and regulations designed to protect consumers – at no additional taxpayer expense.
- Insurers would benefit from protection against unwarranted litigation.
- Regulators would benefit by being able to redirect resources currently consumed in examinations of compliant companies towards areas of greater need.
It is important to note that the incorporation of a compliance self-evaluative privilege in the ICA would not inhibit the exercise of the regulatory and supervisory authority of OSFI in protecting insurance consumers. In fact, it would enhance such supervision by promoting full and frank disclosure between insurers and OSFI, make regulatory review more efficient and effective and, as noted above, allow OSFI to focus scarce resources where they are most required.
2. Sunset Clause of ICA
The current sunset clause in the ICA (and in the Bank Act, the Trust and Loan Companies Act, an the Cooperative Credit Associations Act) is extremely draconian insofar as it requires that companies shall cease doing business after the sunset date. Clearly, in the 21st century, this 19th century provision could literally trigger a national economic catastrophe.
The current sunset clause should be replaced by a clause requiring that Parliament must review the legislation after a specified period of time. This type of clause exists at present in various federal statutes (e.g., Bankruptcy and Insolvency Act) and works well in assisting Parliamentarians in evaluating the effects of the relevant regulatory regime. Under such a clause, the government would be required to commission a review of the administration and operation of the legislation, and if needed appropriate changes would follow.
Furthermore, given that the current sunset date is now about 16 months away, the industry encourages the government to move forward expeditiously to extend the sunset date.
3. Due Diligence Defence for Directors
In addition to the good faith reliance defence that is currently provided to directors (and officers) under the ICA (and other financial institutions statutes), the industry recommends that directors and officers should have the opportunity to raise defences to demonstrate how they have fulfilled their legislative responsibilities (i.e., they should be able to raise a "due diligence" defence).
4. Indemnification of Directors' Costs
The CBCA contains provisions making it clear that a company may indemnify a director for costs incurred in an investigative proceeding and may advance funds to directors for costs incurred prior to the conclusion of any type of proceeding. The industry recommends that similar clarifications be made to the indemnification provisions in the ICA.
5. Directors' Residency
Subsection 167(2) of the ICA requires that a domestic insurer, other than a subsidiary of a foreign institution, must have at least two thirds of its board of directors composed of resident Canadians. With a view to providing greater flexibility in board composition and in order to create harmonization amongst corporate rules in federal statutes, the industry recommends that, ideally, the board residency requirement in the ICA should be amended to mirror the 25 percent residency requirement contained in the CBCA. If that preferred approach is not adopted, as a minimum, the Act should require a simple majority of resident Canadians.
Prior to the 1992 federal legislation, domestic insurance companies were required to have a majority of resident Canadians on their boards. Today, life and health insurance companies in Canada have vast international operations. In fact, Canadian-owned insurers derive over 60 per cent of their revenue from outside Canada. They insure almost 20 million policyholders in more than 20 countries abroad and those numbers are expected to grow in the future. It is both prudent and reasonable that Canadian insurers have board representation from the various international sectors in which their business is conducted. It is also important that boards not be overly large. To accommodate both of these desirable objectives, the rule ought to parallel the CBCA or, as a minimum, should be changed back to a requirement for a majority of Canadian residents.
With the emphasis on corporate governance generally over the last few years, and with the release of OSFI's Corporate Governance Guideline in 2003 in particular, it is difficult to understand the rationale for artificially restricting the number of non-Canadian directors on the Board. The reality is that it is difficult to find Canadian residents with detailed knowledge of the business environment in many of the foreign jurisdictions in which the large Canadian companies carry on business and to simply add non-Canadians to the Board would require the size of the Board to be increased, whereas leading corporate governance advocates are recommending that smaller Board sizes are more effective.
6. Restrictions on Partnerships
The requirement in section 472 to obtain the Superintendent's approval to become a general partner in a partnership should be repealed. (Note: subsidiaries can already do so without OSFI's approval.)
7. Classes of Shares
Currently, under section 64 of the ICA, a company must have one class of shares that have voting, dividend, and liquidation rights and that class must be called "common shares". Under section 24 of the CBCA, on the other hand, where the articles provide for more than one class of shares, the voting, dividend, and liquidation rights "shall be attached to at least one class of shares but all such rights are not required to be attached to one class". ICA companies should also have this flexibility.
The industry appreciates this opportunity to provide some initial input on the Consultation Paper for the 2006 review of financial institution legislation and stands ready to assist, in any way it can, as the review process moves forward.
The Life and Health Insurance Industry in Canada's Economy
The Canadian Life and Health Insurance Association Inc. (CLHIA) represents an industry that:
- is highly competitive
- : Within Canada, 108 life and health insurers compete aggressively with each other. Standard and Poor's has described it as "tooth and nail" competition.
- provides a wide range of financial security products to about 23 million Canadians and their dependants
- : These products include individual and group life insurance, individual and group annuities (including RRSPs, RRIFs and pensions), as well as supplementary health insurance.
- pays out $44 billion a year in benefits, or $842 million a week
- : Of this total, about 90 per cent goes to living policyholders as annuity or disability benefits, reimbursement of health care costs, dividends, cash surrender values and matured endowments. The remaining 10 per cent goes to beneficiaries as death claims.
- is internationally successful: In more than 20 countries around the world, Canadian life and health insurers have an outstanding track record of competing in foreign markets, with 54 per cent of worldwide premiums generated abroad. In all, the industry protects about 20 million people outside of Canada.
- is a major investor in Canada's economy with assets in Canada of almost $315 billion at the end of 2003.
- is a significant contributor to public finances in Canada
- : In 2002, the industry paid over $2 billion in taxes, with over $825 million going to the federal government. In addition, the industry collects and remits retail sales tax payable by policyholders on group insurance premiums in Quebec and Ontario, which amounted to over $1 billion in 2002.
- is a major employer
- : In total, about 118,000 Canadians earn some or all of their living from the industry. More than 52,900 people work full time for life and health insurance companies in Canada. In addition, 65,100 independent insurance agents earn at least part of their income from the life and health insurance business.
- contributes to small business
- : The products of life and health insurers and the consultative role of life insurance agents are useful factors in helping small and medium-sized businesses attract and retain a skilled workforce.
- is internationally successful
- : In more than 20 countries around the world, Canadian life and health insurers have an outstanding track record of competing in foreign markets, with 54 per cent of worldwide premiums generated abroad. In all, the industry protects about 20 million people outside of Canada.
- has operated, for over 30 years, the Consumer Assistance Centre which has helped more than 1,115,000 consumers since inception, providing assistance to Canadians from across the country in both English and French, through toll-free telephone lines and through its website. The Centre provides:
- about life and health insurance companies and their products, CompCorp, and other industry-related topics including information on restitution for Holocaust victims and their heirs;
- consumer guides
- about the industry's products and services;
- policy search assistance
- in locating lost policies of a recently deceased family member;
- has established an independent OmbudService for consumers
- of life and health insurance products, the Canadian Life and Health Insurance OmbudService (CLHIO), which is part of the Financial Services OmbudsNetwork, an integrated industry-based system of recourse for consumers of financial services.
- has established CompCorp, an independent, industry-funded consumer compensation organization
- that protects policyholders in the event of the insolvency of a life and health insurance company.
|December 2004 Customer Information and Confidence Initiatives|
|The industry's customer information and confidence initiative reinforced and extended protections in 5 key areas:||In December 2004, the life and health insurance industry announced five initiatives that build on existing consumer protection measures to ensure that customers continue to have the information they need to make the best choices for themselves and their families. The initiatives included:|
|Consumer awareness||Increased Consumer Awareness: CLHIA's member company websites will make accessible the Consumer Assistance Centre, the industry's consumer publications and the Consumer Code of Ethics, to which all member companies are committed.|
|Product disclosure||Product Disclosure: Consumers considering life and health insurance products will receive a product profile conforming to CLHIA's new Guideline on Product Disclosure.|
|Compensation review||Compensation Review: Life and health insurers will regularly review and assess their sales-related compensation practices and structures including from the perspective of their customers' interests.|
|Travel incentives||Travel Incentives: Companies offering such incentives will make disclosure of potential eligiblity by the intermediary a condition of eligibility.|
Intermediary Disclosure: Companies will work cooperatively with advisors distributing life and health insurance products so that customers receive a brief, clear intermediary disclosure document. Over the period since December, CLHIA has worked cooperatively with a number of intermediary organizations and those efforts have produced a Reference Document on Advisor Disclosure. This document is now being distributed by companies and intermediary organizations to financial advisors throughout Canada who distribute life and health insurance products. The advisor disclosure document will include:
i) information about the insurers that the advisor represents,
ii) information about the nature of those relationships,
iii) information about how the advisor is compensated,
iv) information about eligibility for additional compensation, either monetary or non-monetary, including industry travel incentives,
v) information about any conflicts of interest, and,
vi) the fact that the customer has the right to ask for additional information.
Summary of Selected CLHIA Guidelines regarding Product Disclosure
Guideline G1: Product Disclosure
Guideline G1, Product Disclosure, establishes standards for information about the product that is made available to prospective customers. It applies to all individual life and health insurance products, with the exceptions of Individual Variable Insurance Contracts (IVICs) and Travel Insurance, both of which are covered by their own Guidelines (see G2 and G5 below). It requires that information be provided about product features and benefits, which (if any) of these may be non-guaranteed, any limitations, reductions and exclusions, and how the consumer can access additional information.
Guideline G2: IVIC Guidelines
Guideline G2, Individual Variable Insurance Contracts Relating to Segregated Funds, sets out information that must be provided to the consumer prior to the sale of a segregated fund in the form of an Information Folder. This includes a description of the benefits under the contract, which benefits are guaranteed and which are not, a brief summary of each segregated fund's investment policy, and the Financial Highlights showing the past performance of each fund, along with a statement indicating that subject to any applicable death and maturity guarantee, the premium is invested at the risk of the contractholder and may increase or decrease in value according to the fluctuations in the market value of the assets of the segregated fund.
Guideline G5: Travel Insurance
Guideline G5, Travel Insurance, requires that purchasers of travel insurance have access to full information about the product being made available. Specifically, information must be provided outlining the details of the benefits, limitations and exclusions and other conditions of coverage, along with instructions related to the submission of a claim.