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B.C. Rules Create Challenges for Creditor Life Insurance

About a year and a half ago, FICOM made a subtle but impactful rule clarification in B.C.

The regulator stated that lenders must “play an active and substantial role” in creditor life insurance in order for mortgage brokers to be able to sell it to B.C. consumers.

Basically, this means that the lender has to first understand and approve of the creditor life product and its suitability for borrowers. Otherwise, its B.C.brokers would not be considered exempt from insurance licensing requirements.

To the average onlooker this doesn’t sound like a big deal, but it creates real problems:

  1. If a lender hasn’t “effected” (approved) a third-party creditor life product, brokers can’t even talk about it. Clients who need coverage could then overlook it altogether, which could create financial risk for them later on.
  2. If a lender doesn’t effect third-party coverage, its customers typically get pitched inferior in-house creditor life products. That’s the big issue right there. Lender-provided products aren’t portable. That means the customer has to reapply for coverage if they switch lenders. They face higher premiums (sometimes much higher) when they do. If they’ve had health issues since their last mortgage, they may not get covered at all, which is a serious risk.

Most broker lenders have signed on with the largest third-party provider of creditor life in Canada (MPP). But many haven’t. The notable exceptions are certain banks and credit unions who—not coincidentally—have their own creditor life products. Since those products are not portable, they effectively act as retention tools to keep that lender’s customers bound to it.

We hear that some lenders (like First National and MCAP) have their own C-life products but make third-party products available anyway. They do this to be broker and customer friendly (good on them).

Now, you may be wondering why FICOM has taken the position it has. Here’s what Chris Carter, Deputy Superintendent of Supervision told CMT:

FICOM has undertaken a number of investigations of creditor group insurance (CGI) that stemmed from consumer complaints. Common concerns include aggressive sales practices, inadequate oversight by insurers over CGI distribution, inadequate training of CGI sellers, and lack of creditor involvement in the initiation of a CGI product. The Information Bulletin was issued to address these consumer protection concerns.

When CGI is sold through an exempt channel, including through mortgage brokers, consumers do not have the benefit of advice from a licensed insurance professional to help determine whether the insurance is suitable to their needs. In this environment, FICOM believes that strong oversight and controls by insurers, and creditor involvement in the development of the CGI product, are essential to protect the interests of consumers.  

FICOM’s Bulletin also states that exempt sellers (mortgage brokers) must:

  • ensure that customers understand the voluntary nature of CGI;
  • not engage in tied or coercive selling;
  • not enrolling ineligible customers;
  • provide clear information to customers on terms and conditions; and
  • know when to refer customers to the insurer.

Creditor life is inferior to term life in most cases (not all) and FICOM is clearly trying to protect consumers, which is great. Unfortunately, like many regulations, there are side effects.

FICOM maintains that in British Columbia, creditor life must be “effected” (as FICOM has stipulated) by the creditor under sections 37 and 92 of the Insurance Act. It says its stance does not change existing legislation. Industry groups disagree with that interpretation, however, so expect more wrangling to come on this issue.