THE GLOBE & MAIL ON CANADA'S INSURANCE LOOPHOLE: WHAT ELSE IS WRONG?

"Once licensed, a life agent is not subject to any mandatory industry oversight, which differs significantly from all other sectors of the financial services sector [such as] property and casualty insurance, securities, mutual funds and real estate."
— Gerald Matier, executive director of the Insurance Council of British Columbia

That quote comes from a detailed investigation into the mysterious world of life insurance by the Globe & Mail. Do read through Canada's insurance loophole for yourself.

Silence Condones

Those in the insurance world rarely take a public stance before an issue arises or even afterwards. Silence is a lousy option. I've asked for help for years. Here are two examples.

• 2007: Refuting myths about universal life insurance
• 2009: Squawking about life insurance

I no longer bother asking but do what I can. Here are my thoughts on matters that aren't widely discussed.

No Education Required

When we bought a Toyota 11 years ago, the manager said that new salespeople must have university degrees. Why? Because consumers were more educated and demanding.

Even today, there are no educational requirements to get a license to sell life insurance. You don't need to graduate from university, college or even high school. Your language and math skills aren't directly tested. In Ontario, you write a multiple choice exam with 140 questions. Get 55 wrong and you still pass.

I've written lots of exams but the Life Licence Qualification Program (LLQP) is the most bizarre and degrading. You're forced to take a course and pass a trial exam before you're allowed to write the provincial exam. I went through this process last year. At the trial exam, one candidate said he'd already failed six times. At the real exam, there were candidates who'd already failed more than once.

Candidate Conduct

Here's the degrading part. There are rules for candidate conduct. Here's an excerpt from the FAQ.

The following will not be tolerated either during the exam sessions or while communicating with any of the administration staff: swearing, raised voices, threats of violence, physical confrontation. 

Candidates are expected to arrive at the exam session dressed "business casual" and cleaned as if they were attending a client's home. 

During the exam, candidates are expected to restrain from making distracting noises and actions that may be considered in poor taste by the general public.

Aren't those rules common sense? Yet there must have been enough issues to warrant writing them. There are even explanations for the rules. For instance, the dress code is in place to "afford a level of professionalism … and to show respect for the other candidates". Guilty until proven innocent.

No Training Provided

Entering a field without experience is fine but there's little training for rookies. Where help is available, the trainer wants to be paid. Whatever happened to mentoring?

The rookie's initial prospects are friends and family. In a sense, the trainer is paying the rookie for access to them during joint sales calls.

Heaped Compensation

Rewards affect behaviour. Insurance advisors receive most of their compensation at the time of sale. This puts the emphasis on selling you new insurance and replacing old coverage instead of servicing what you already have. How is that in your long term interest? Client satisfaction surveys routinely show that you aren't getting the level of post-sales service you expect.

Complicated Products

Insurance combines the worlds of risk, accounting, investing and law. That's very sophisticated and requires a team approach (see The Financial TRAIL). Using a team creates two problems for you

• cost: advisors are reluctant to pay, which restricts the quality of expertise you get
• bias: if your advisor gets free help from a specific insurer, there's an obligation to sell that company's products

Poor Explanations By Insurers

Insurance companies are out to make money for their shareholders. Do you think they spend their marketing dollars on low revenue products? Do you think they disclose all  the drawbacks? Do you think all the advisors selling the products have a sound understanding?

This week, I saw an odd presentation on how to use a retirement income calculator to sell investments. A case study was used. The assumptions weren't clearly stated and seemed biased. As you might expect, the high compensation solution "won".

The presenter had no handouts and even refused to email attendees a copy of the presentation for review. No reason was given. Instead, you could get training on how to use the tool. That nicely deflects the responsibility for usage and results to the advisor.

No Public Hangings

The investment world actively polices, penalizes and publicizes. Here are several examples from this week.

• $1,000,000 fine for poorly documented third-party arrangement (Jan 20, 2011)
• $400,000 fine for firm and two reps (Jan 21, 2011)
• $75,000 fine for mutual fund salesman (Jan 21, 2011)
• $50,000 fine and permanent ban in misappropriation case (Jan 17, 2011)

You need to see the tricks advisors use and boundaries to product conduct. The life insurance world combines low barriers to entry, heaped commissions and complicated products. There's bound to be trouble. Where are the public hangings?

My Mission

I've tried to act as your advocate by giving you insider insights. Here are some posts over the years.

2007

1. How to pick an advisor: chemistry and credentials (my second post ever)
2. Does Warren Buffett "buy term and invest the difference"? (an emotional and ongoing question)
3. The Financial TRAIL to taming your financial risks (picking the right resources)

2008

1. Keeping promises: do you care about corporate governance? (an important but overlooked consideration)
2. The two drawbacks of investing in life insurance (yes there are issues)
3. The top five insured strategies (the classics lack sizzle but still work)
4. The top insurers: is bigger better or best? (the financial meltdown)
5. The pros and cons of financial leveraging (there are two sides)

2009

1. How advisors fool you (and what you can do) (be forewarned)
2. Why you can't buy on price (there are differences)
3. Why financial literacy eludes us (there are reasons)
4. Secret 7: The best tax sheltering in Canada (did you know?)

2010

1. How advisors really prepare term life insurance quotes (you might be surprised)
2. What to do when your term 10 rates are about to spike (a case study)
3. Three keys to getting your insurance claim paid (widely overlooked yet more important than price)
4. Does your advisor have these three elements? (a quick check)
5. The foolproof measure of trust (the best check I've yet found)

I'll continue in 2011. It would be so helpful if others would participate in this process of educating.

Links

• Through Canada's insurance loophole (Globe & Mail, Dec 10, 2010)
  • Response from The Financial Advisors Association of Canada (Advocis, Dec 18, 2010)
  • The ketchup is out of the bottle (Jim Ruta, Dec 21, 2010)
• LLQP FAQ (Durham College)
• What your insurance broker doesn't want you to know (Globe & Mail, Dec 21, 2010)
• Insurance regulator aims to close the wholesaler loophole (Globe & Mail, Feb 13, 2011)
• Why after-sales service stinks for life insurance (new)
• The word advisors imply but dare not use
• image courtesy of Carole Nickerson (Halifax, Nova Scotia)

Podcast Episode 101 (8:19)

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PS The next post will be shorter!