Monday, May 5, 2014

(No.262) Regulator games-playing in insurance: agent licensing revisited

"Regulatory games-playing in insurance: agent licensing revisited"

by Alastair Rickard

I was both surprised and interested to read the March 28 report by Armina Ligaya in the Financial Post "Insurance deal with Quebec stirs alarm". It is not only welcome but an overdue article in the financial media about the curious project initiated by CISRO (the Canadian Services Regulatory Organizations) and the AMF (Quebec's Autorite des marches financiers) to replace the LLQP ( the Life Licensing Qualification Program) for life insurance agents in the common law provinces at a cost in the millions. 

The FP article is, to my knowledge, the first and only such article on this subject in a daily newspaper. This sweetheart deal between the bureaucrats in CISRO and those in the AMF has been misrepresented, not merely oversold, and will do more harm than good.

Although I am now retired from the life insurance business my interest in this particular regulatory project is not a casual one. During my years in the Canadian life insurance business I spent a great deal of time, including sixteen years as chair of the Canadian Life and Health Insurance Association's (CLHIA) standing Committee on Distribution & Intermediaries, involved with insurance regulators and regulatory issues. Much of this activity dealt with the sale of life insurance and the licensing of those who sell the policies.

More than a decade ago provincial insurance regulators outside Quebec decided that the examination regime then in place as a requirement for someone to become licensed as a life insurance agent needed to be updated and upgraded. (Outside Quebec all such persons, whether or not they hold themselves out to the public as 'life insurance brokers', were then -- as now -- actually licensed as life insurance agents per se).

Back then the regulators were right on both counts and I agreed with them although I had serious concerns about the particulars of their plan for the original LLQP.

Nor did I care for the way in which several insurance regulators came down from their bureaucratic mountains carrying a tablet on which had been inscribed their blueprint for a new regime and presented it to life insurance industry stakeholders as a virtual fait accompli. Now, a decade on, history has repeated itself as the March 28 Financial Post article reported and as I have indicated previously in several RickardsRead columns.

In fact the reality of what happened then was the onset of a somewhat belated urgency of focus which energized several elements in the life insurance business. They awakened to the potential problems of the LLQP regime as originally drafted. There was push back, discussion and joint effort. Over time a number of industry people including CLHIA staff spent many hours working together as well as with certain regulators to improve the  proposed LLQP -- with some success.

A particular aspect of Canadian insurance history is now being revisited. CISRO, the inter-jurisdictional group of provincial insurance regulators, having consulted nobody outside regulatory ranks beforehand (not even the four life insurance companies among the total of fourteen registered LLQP course providers), announced on July 5, 2012 a  replacement regime for the original LLQP.

The regulators then declared they were ready for discussion with industry stakeholders -- but in reality only about details on the margins of their plan. While pains have been taken to present this regulatory initiative as if it will be just a "harmonization" of the LLQP, and while it may still have the same name once implemented, the proposal actually is for a new regime to be prepared by Quebec's financial services regulator, the AMF, and will follow the Quebec model including multiple exams based on separate study modules and manuals.

The insurance regulators' recent and for a time secret deal among themselves to replace the LLQP is even more cynical and has even less to do than I had originally thought with the supposed need to 'enhance educational/licensing standards' (i.e., de facto, to replace the existing LLQP) than it does with the private agenda of certain provincial insurance regulators. 

For example: back in 2012 CISRO's designated regulatory point man for the LLQP project, Ron Fullan of Saskatchewan, declared privately to colleagues that "if we can convince all of the [14] course providers to use our [LLQP] study materials, and taking a course is mandatory, then we will in essence create a scenario where purchasing our material is mandatory." 

Indeed it is now clear that there was never any intention even of alerting LLQP stakeholders to what was being planned much less for regulators to actually consult with them about the intended 'harmonized" LLQP regime prior to locking in the plan and its participants. The provincial signatories had all gotten into line on the agreement by June of 2012. As Mr. Fullan had declared to fellow regulators in March of 2012: " CISRO will not enter into direct contact with external stakeholders regarding the national program." And they didn't. 

The plot of this bureaucratic tale can be briefly summarized:  the LLQP requires neither replacement nor "harmonization"; the common law province insurance regulators see themselves facing a funding gap when it comes to the LLQP and related matters; Quebec insurance regulators have operated a higher cost insurance regulatory regime the expense of which they have long wished to spread by reaching some deal with the common law provinces. Result? A deal to "harmonize" the LLQP, with Quebec's AMF regime doing the work with the other provinces agreeing to implement the result and backstop initial costs.

The reader may well say, so what?

The 'so what' is the prospect of replacing an LLQP regime into which much expertise and effort has been invested, one with a clear record, with another approach developed by the AMF whose own licensing process and standard of results are not superior to those in the common law provinces. But its higher costs as a system as well as for licensing exam students/writers combined with increased complexity, inconvenience, awkwardness and bureaucracy will (among other things) constitute yet another barrier to getting new people into the difficult business of providing Canadians with genuine opportunities to purchase life insurance.

This matters in terms of the life insurance consumer because, the imperfect understanding of certain 'expert' critics of the industry to the contrary notwithstanding, the bulk of new individual life insurance in North America continues to be sold by agents, i.e., people who are actively in the marketplace finding and advising people who will not initiate the purchase of this core product ( an important one to society as well as to individuals' survivors) either at all or in appropriate types and amounts.

Another aspect of this LLQP licensing regime, past and future, is the failure -- in some cases even the resistance -- of most provincial insurance regulators to placing greater emphasis on higher levels of continuing education being required of licensed agents (combined with vigorous supervision and enforcement of same) and to recognizing the importance to the consumer of the value of experience.

The reality is that provincial insurance regulators are uninterested -- in terms of setting a requirement -- in whether an agent, once licensed, ever sells a life insurance policy to anyone. This is one major reason why regulatory interest in higher standards of required ongoing continuing education for agents is limited to say the least. After all CE does not generate licensing revenue. 

More to the point, this proposed approach to licensing using 'son of LLQP' is both unnecessary and unjustified and carries with it the prospect of increased challenges for potential entrants to the business in the common law provinces in comparison with a continuation of the current LLQP regime. The "harmonized" regime will inevitably cost would-be agents in the common law provinces (who, of course, will ultimately be the ones who have to bear directly and indirectly the lion's share of increased cost of the "harmonized" system) more to acquire study manuals and write each of the multiple exams. 

Not incidentally the revenue generated to Quebec from the "harmonized" regime will be used to offset more of the costs of its entire insurance regulatory regime. It's regime for property & casualty insurance has been subsidized by revenue derived from licensing life insurance agents.So important to the AMF is the revenue to be gained from its involvement with 'harmonizing' the LLQP that it has guarded its interests in this deal with the common law provinces by obtaining a de facto veto on six core elements in the handling of and future changes to the new LLQP regime.

There has so far been rather too much passivity in response to the CISRO 'harmonization" proposal by insurance companies which ought to know better, having been down this road before. They have a direct, ongoing interest in bringing new people into agency systems. 

Of course in this respect there is a fundamental complication: these days even fewer life insurance companies in Canada are actually doing this challenging job to any significant extent. Apart from significant recruiting activity by a few life insurance companies in Canada like Sun, London and Primerica it's more appealing to the others to try to rely on attracting new individual life insurance business from experienced people, i.e., from those already licensed and in the marketplace.

It would perhaps be a bit unfair regarding this subject to say of Canada's provincial insurance regulators, as Warren Buffet has of financial world analysts, that they would rather be wrong as a group than right on their own.But the regulators in CISRO know, both through instinct and experience, that it is easier to win a public policy argument with stakeholders when you get to frame it yourself, especially when you have done so before other interested parties even know about it. And that is what has been happening with the 'new' LLQP.

The current opposition to the proposed new approach involving the LLQP seems mainly to range from serious doubt to vigorous opposition. My impression is that most of those stakeholders who are concerned would welcome genuine enhancement of the existing LLQP content but oppose adoption by the common law provinces of a new AMF-designed and developed modular regime based on the existing Quebec model. 

Many of the sceptical LLQP course providers as well as various life insurance industry stakeholders have wondered from the time they learned in mid-2012 of this regulatory blueprint:  why complicate and make it more expensive and difficult for those in the common law provinces who might seek to become licensed to sell life insurance when a proven licensing regime (the LLQP) already functions and is in place, one which was developed after a lengthy process in which stakeholders were directly and materially involved? To whose benefit?

A core element of the answer to that question involves more money and funding from applicants and stakeholders to provincial government licensing programs and agencies, particularly Quebec's -- but not improved licensing standards.

The possession by Canadians of adequate life insurance protection is a vital factor in the well-being of their survivors as well as an important contribution to Canadian society. Yet selling individual life insurance is the toughest vocational challenge in financial services in major part because individual life insurance is the most client resistant financial product.

The life insurance agent has long been the subject of a prejudice against commission-based selling that is today the stock-in-trade of those in the financial services commentariat who apparently believe that distributing financial products should be undertaken as some sort of philanthropic activity, one unrelated to anyone earning anything from it lest the member of the public be harmed by a distributor's financial incentive to put life insurance coverage in place.

Among the members of this segment of the media's chattering classes there is of course an implied exemption for fee-based activity which appears to occupy a holy place in the view of those willing to ignore certain relevant facts. For example: that 'fees' can be and often are de facto commissions however disguised. 

The fact is that most people don't want to buy individual life insurance, either at all or in useful forms ( here I exclude useless and/or over-priced types of coverage like guaranteed issue burial coverage or the industry's own form of lottery ticket -- accidental death insurance -- which carries an appeal to certain uninformed consumers which prompts their intiative). 

The purchase of an individual life insurance policy is inseparable from contemplation of one's own mortality, something most people are reluctant to do and hence to initiate purchase. And the younger the adult, the greater his or her conviction that the product is unneeded because the possibility of dying is thought of as so remote as to preclude the need for the product. The nearest parallel is the surprisingly high proportion of Canadians, even among the more wealthy, who have no wills.

The statistical record of this life insurance industry reality is of long standing. For example a 2013 study of life insurance ownership among middle class Canadian households indicated that 85% are under-insured or have no individual coverage. Also -- and no surprise here for those who actually understand the realities of life insurance distribution -- there is a direct correlation between life insurance purchase and ownership and the availablility of active, 'selling' agents. The fewer such agents the greater the number of consumers who are under-insured or uninsured.     

To find men and women who are prepared to make an ongoing core activity of finding prospects for the purchase of life insurance, of talking to them, identifying and establishing what the need is and convincing them to meet that need by purchasing the policy (i.e., to 'sell') is a challenge, one that most people either refuse to embrace or, having taken it on, give up. Providing genuine opportunities to buy in the real market place is hard work and success requires continuing commitment and training combined with the psychological resilience to handle repeated rejection.

During my years as an executive as well as a public commentator on the life insurance business no topic has attracted as much of my attention in terms of editorials and speeches as the importance to the economic and social well-being of society of people having adequate individual life insurance coverage. The real world of the life insurance business involves as a core activity the "selling of stuff" to Canadians, the concomitant importance of their having genuine  opportunities to acquire individual insurance coverage (critical illness, personal health, long term care, income disability and, above all, life insurance) and the central role in serving the public in this regard of the active, prospecting agency distribution system in its several forms.

The word active is useful in order to distinguish prospecting, 'selling' agents from those who are licensed as life insurance agents but who are -- if they 'sell' any policies at all directly to the public -- part of a passive agency system of distribution. It is one which deals with that small minority of buyers who initiate the purchase of coverage.

No aspect of the life insurance business has been more poorly understood, more consistently misrepresented and whose important role more consistently underrated or ignored than agency distribution of individual policies. The reality of the agency system has, in my experience, remained a mystery not just to many industry outsiders especially in the media (including 'consumer/financial' columnists) but to the majority of life insurance company executives and insurance regulators alike making decisions affecting the system's health and future.

I have discarded from my diminishing portfolio of life insurance business enthusiasms the addressing of such executive, regulator and media deficiencies by suggesting to their exemplars that since they do not understand much about the reality of agency distribution it would generally be a good idea not to pronounce on the subject until they have learned more about it.

To assist the non-industry reader to really appreciate the impact of myth and codswallop on understanding of life insurance and its distribution would require far more space than I intend to take up here. However I will touch on one myth directly related to any realistic assessment of the 'new' LLQP and why having a greater rather than lesser number of active life insurance agents is important to the public.

The myth is that Canada already has enough people licensed to sell life insurance, 91,000 by one recent estimate.

The industry reality is that fewer than 10,000 of these life licensed agents are full time career agents while 81,000 are classified by the industry as "independent insurance agents at least part of whose income comes from the life and health insurance business". Not even half of the agents holding life licenses in Canada are in any real sense actively engaged in the business of selling individual life insurance coverage. Many thousands of them sell little or no life insurance coverage.

Such inactive life agents have life licenses for various reasons that have nothing to do with a desire to be permitted to sell individual life insurance. There are various reasons for this apparent anomaly; for example one reason is because they need or their employers want them to hold life licenses so they (or their employer) can claim they are fully licensed; in many cases it is because regulators require a license in order for non-selling 'life insurance agents' to split commissions with real agents to whom they have referred clients.

The core fact is that there are too few genuine 'selling' life insurance agents in Canada to serve the public and provide them with enough genuine opportunities to buy this important financial product.

Perhaps the oldest aphorism in the life insurance business is this: life insurance is not bought it is sold. While it is rooted in past experience it remains current reality. Mostly it still takes an agent using needs-based selling to prompt purchase. Even with mutual funds, a product Canadians commonly like and want, more than 4/5 of purchases involve a sales person.
One concern about the proposed LLQP regime is only partly rooted in the fact that the sort of fundamental changes planned are unnecessary, ones not required to correct pedagogic deficiencies but rather are a so-called reformation activated by parochial desires of and bureaucratic needs perceived by certain provincial insurance regulators.

A major concern I have with 'LLQP revisited' is the fact that it will certainly for some years (at the least) following implementation unnecessarily depress the number of people prepared and able to enter the agency system by clearing a bar whose degree of difficulty will have been determined by a licensing regime reconfigured to satisfy the financial interests of provincial insurance regulators, not any increase in useful knowledge to aspiring entrants to life insurance licensed status.

The effect on the public interest of a revised, 'modular' LLQP-induced negative impact on the inflow of new agents will be to make even fewer the genuine opportunities for Canadians to purchase a fundamentally important financial product, one that is the prudential product base of an intelligent financial planning pyramid. Such a result would be entirely avoidable collateral damage.

One needs to calibrate the significance of that malign result of so-called agent licensing reform using yardsticks which actually indicate the reality of how most individual life insurance coverage gets put in place; how and by whom it is sold, serviced, retained, upgraded and where necessary replaced.

Based on long experience I have low expectations of the ability and/or willingness of most media financial services pundits and self-appointed advocates when it comes to understanding the important role and contribution of real (i.e., active, prospecting, selling) life insurance agents to the public good as well as that contributed by the agency distribution systems to which they belong.

Such 'experts' often enjoy the luxury available to pundits of leaving the life insurance industry's complexity and nuance to others. Indeed their attention to the subject, however superficial, is routinely uninformed or idiosyncratic.

Therefore it needs to be made clear based on industry and market place reality: the approach taken by CISRO and the AMF avoids the path which could be the most useful to consumers and stakeholders alike -- a careful revision of the existing LLQP study material, exams and process. In other words an approach that would not have embraced an unnecessary and bureaucratically self-interested process driven by some provincoal insurance regulators.

Dressing up the current LLQP 'harmonization' process by trying to cloak it in the camouflage of pro forma consultation with stakeholders (but after the fact) fools only the uninformed or the credulous. Nor does it alter the fact that it does not serve the best interests of the Canadian life insurance  consumer. 



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