Individual variable insurance contracts: CCIR and CISRO propose a regulatory framework for public consultation

Background

The Canadian Council of Insurance Regulators and the Canadian Insurance Services Regulatory Organizations have published a draft guidance document for public consultation on the regulation of individual variable insurance contracts¹ — specifically, proposing to create a national, principled standard for insurers and intermediaries offering and/or servicing IVICs² in Canada (the Proposed Guidance).³ The Proposed Guidance is available on the CCIR⁴ website here and the CISRO⁵ website here.

The Proposed Guidance sets out a variety of expectations on insurers and intermediaries for the design, distribution, issuance, sale and administration of IVICs. Once the Proposed Guidance is finalized, insurance regulators in the Canadian provinces and territories will be expected to implement the principles set out in the Proposed Guidance within their own respective jurisdictions.⁶

This legal update provides a high-level overview of the insurance regulatory framework that would apply under the Proposed Guidance,⁷ including: the design of IVICs; training and compensating intermediaries; advertising of IVICs; know your product, know your investment strategy and know your customer expectations; recommendations and advice; corporate governance and ongoing administration; recordkeeping; and oversight.

Summary of CCIR / CISRO proposed regulatory framework for IVICs

Design of IVICs

Under the proposed regulatory framework, insurers designing IVICs (or making significant changes to existing IVICs) would be expected to build in considerations of the target customers, including their expected characteristics, interests and needs. There would also be a general expectation to identify and avoid, or properly manage, any conflicts of interest when designing or significantly changing IVICs.

Notably, there would be specific expectations and restrictions for advisor chargeback sales charge options — i.e. a sales charge option where an insurer provides monetary compensation to an intermediary and where the intermediary may be required to repay all or part of the monetary compensation to the insurer under certain circumstances.⁸

For example, insurers would be required to establish and maintain policies, procedures and controls reasonably designed to ensure that the advisor chargeback sales charge option would only be offered for an IVIC in a manner that is fair to customers, such as by ensuring there are alternative forms of sales charge options offered to customers.⁹

Training intermediaries

Insurers would be expected to make training material available to intermediaries who sell or service their respective IVICs. Intermediaries would be expected to complete the applicable training and develop the knowledge and expertise to comply with the Proposed Guidance. Moreover, there would be heightened expectations and additional training requirements for intermediaries who promote borrowing to invest in IVICs, partly due to the increased risk to the consumer when borrowing to invest.

Compensating intermediaries

Insurers and intermediaries providing monetary and non-monetary compensation to intermediaries in relation to IVICs would be expected to consider the ultimate target customers in the compensation process, including their expected characteristics, interests and needs. There would also be a general expectation to identify and avoid, or properly manage, any conflicts of interest in the compensation process.

More practically, insurers and intermediaries would be expected to develop policies, procedures and controls that are reasonably designed to ensure they put the customers’ interests ahead of their own when compensating intermediaries in relation to IVICs. For example, an intermediary generally would not be permitted to offer a time-limited increase in monetary or non-monetary compensation to another intermediary in connection with the sale of a particular IVIC, as this would incentivize intermediaries to pressure consumers to complete IVIC-related transactions quickly and (potentially) contrary to the consumers’ interests.

Advertising of IVICs 

Insurers and intermediaries would be expected to treat customers fairly in their advertisements of IVICs. In particular, the advertisements would need to be presented clearly and accurately — and in a manner that would help the target customers understand the advertisements and the applicable IVICs, so they are able to make informed decisions about investing.

Know your product

At a minimum, and prior to selling or servicing IVICs, intermediaries would be expected to know, understand and be able to explain an IVIC, how an IVIC functions, and the associated risks (e.g., the potential to lose money), as well as the characteristics of the IVIC being sold or serviced, the features of each investment option available under the IVIC, and the choices available under the IVIC that are suitable to meet the needs of the customer.

Know your investment strategy

At a minimum, and prior to selling or servicing IVICs, intermediaries would be expected to know, understand and be able to explain the general benefits, risks and costs to the customer when borrowing to invest in an IVIC.

Additionally, at a minimum and prior to providing advice about borrowing to invest in a particular IVIC, intermediaries would be expected to know, understand and be able to explain a leveraging strategy, how to create a leveraging strategy for a customer, how to assess the suitability of a leveraging strategy for a customer, how to monitor a customer’s circumstances and detect material deviations from the customer’s leveraging strategy, and any reasonable steps to take if there is a material deviation from a customer’s leveraging strategy. 

Know your customer

Intermediaries would be expected to take reasonable steps to collect up-to-date information about a customer that would enable them to assess their customer’s needs, determine whether an IVIC is suitable, and provide suitable recommendations and advice. 

More practically, at a minimum, and before selling or servicing IVICs, intermediaries would be expected to take reasonable steps to collect up-to-date information about their customers’ personal and financial circumstances, investment and insurance needs and objectives, investment time horizon, level of knowledge about investments, and risk tolerance and capacity. Intermediaries would be expected to explain to the customer why this information is being collected and how it will be used. Intermediaries would also be expected to fully update each customer’s information at specified intervals.

Recommendations and advice

There would be a general expectation for intermediaries to maintain an appropriate level of competency in order to provide recommendations and advice to customers about IVICs, as well as a general expectation that intermediaries provide recommendations and advice to customers that are suitable and appropriate. 

Corporate governance and ongoing administration 

Insurers that establish and maintain segregated funds available for deposits under an IVIC would be expected to prepare financial statements, appoint auditors to report on the financial statements, ensure segregated funds have investment policies (and monitor for compliance under the investment policies), and ensure all fundamental changes, partitions, mergers and closings of segregated funds comply with the detailed requirements under the Proposed Guidance. 

Recordkeeping 

Intermediaries would be expected to create and maintain up-to-date records for a variety of IVIC-related matters, including: training completed by the intermediary; training provided to other intermediaries; conflicts of interest that have been identified and avoided or properly managed; chargeback arrangements designed to compensate other intermediaries; notifications to insurers or other intermediaries that have oversight responsibilities; customer information; needs analyses conducted for customers; and recommendations and advice provided to customers.

Intermediaries would be expected to keep these records secure and in a format that is easily accessible and readable — and for retention periods of a minimum of five years or such other period set out in applicable law.

Oversight

Insurers would be expected to oversee their own activities and those of persons authorized to act on their behalf for IVICs. In particular, insurers would be expected to establish and maintain policies, procedures and controls reasonably designed to ensure the activities are conducted in compliance with the Proposed Guidance. 

Intermediaries would be expected to oversee other intermediaries when there is a legal or contractual oversight responsibility that applies. As with insurers, intermediaries would be required to establish and maintain policies, procedures and controls reasonably designed to ensure the activities are conducted in compliance with the Proposed Guidance. 

As a practical example, insurers and intermediaries would be expected to monitor activities and circumstances of the persons they oversee for any indication that would suggest sales practices or IVIC transactions that contravene applicable laws and guidance, including the Proposed Guidance.

Consultation period open to industry and the public 

CCIR and CISRO have taken a keen interest in IVICs at least as far back as 2016¹⁰ — and the recent publication of the Proposed Guidance suggests that the regulation of IVICs continues to be a priority issue for Canadian insurance regulators. Accordingly, industry members may wish to make submissions in this consultation process to ensure their expertise and experiences in relation to IVICs are properly reflected and considered by CCIR and CISRO, as they make revisions and finalize the Proposed Guidance. 

We note this public consultation is open for a 90-day period and will close for comments on April 8, 2025. Submissions should be provided by email to the CCIR Secretariat at ccir-ccrra@fsrao.ca. CCIR and CISRO may publish submissions they receive for this public consultation on their websites.