BC rules complicate creditor life insurance for clients

by Leo Almazora26 Apr 2017
More than a year ago, Financial Institutions Commission (FICOM) clarified a rule that governs creditor life insurance in BC. The move was meant to help investors, but it may have led to unintended consequences.

“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 BC consumers,” reports Canadian Mortgage Trends.

The provision means that lenders must understand and approve of any creditor life insurance plan, including its suitability, for their borrowers. Otherwise, BC brokers working for the lenders will not be exempt from insurance licensing requirements.

According to the article, this condition leads to problems. First, brokers can’t even talk about a third-party creditor life product unless the lender firm they work for “effects” (approves) it. This means clients who need coverage won’t even be aware of the option, which could lead to significant financial risks down the line.

Second, lenders that don’t effect third-party coverage will typically pitch inferior in-house creditor life products. Since lender-provided products aren’t portable, clients will have to reapply for coverage if and when they switch lenders. They face the threat of higher premiums once they switch, and if their health coverage is tied to a previous mortgage, they may not get the protection they need.

“Most broker lenders have signed on with the largest third-party provider of creditor life in Canada (MPP),” the article said. “But many haven’t. The notable exceptions are certain banks and credit unions who — not coincidentally — have their own creditor life products.” Since they aren’t portable, the in-house products are effectively used to keep customers from switching.

Speaking to Canadian Mortgage Trends, FICOM Deputy Superintendent of Supervision Chris Carter explained the watchdog’s stance:

“When CGI [creditor group insurance] 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.” 

According to the report, the regulator’s objective to protect clients from creditor life insurance is understandable, since they aren’t competitive with term life products for most cases. But it clearly has led to 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.”

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