- Consulting with Canadians -

Canadian Association of Insurance and Financial Advisors (Advocis) Submission in Response to Finance Canada's Corporate Governance of Financial Institutions:

Advocis
350 Bloor Street East, 2nd floor
Toronto, Ontario M4W 3W8
T 416.444.5251
1.800.563.5822
F 416.444.8031
www.advocis.ca

March 31, 2003

Financial Sector Policy Branch
Department of Finance Canada
15^th Floor, East Tower
L’Esplanade Laurier
140 O’Connor Street
Ottawa, Ontario
K1A 0G5

Attention: Gerry Salembier

Dear Sirs and Mesdames:

Thank you for your invitation to the Canadian Association of Insurance and Financial Advisors to comment on the noted consultation paper (the "paper"). The Association now operates under the name "Advocis".

Advocis grants Finance Canada its permission to post this submission on the Finance Canada Web site.

In January 2003, Advocis commenced operations as the merged association of the Canadian Association of Insurance and Financial Advisors (CAIFA) and the Canadian Association of Financial Planners (CAFP). The legal name of Advocis is the Financial Advisors Association of Canada.

Our association traces its origins to the founding of the Life Underwriters Association of Canada (LUAC) in 1906. CAFP was founded in 1981. Advocis continues an uninterrupted history of serving Canadian financial advisors, their clients and the nation for almost a century. Advocis is a community of financial advisors coming together in voluntary association to advance the practice of their profession.

Our members are financial advisors licensed to sell life and health insurance, mutual funds and other securities. Advocis comprises 17,000 voluntary members, organized in 50 chapters. Advocis members provide financial products and services to over 10 million Canadians. Our common objective is to assist individuals and families to achieve financial objectives through the optimal application of individual and group financial products. As such, Advocis continues nearly a century of experience in representing Canada’s intermediaries in life and health insurance.

The core activities of Advocis are:

• Education: Advocis maintains standards of proficiency through short and long term educational programs and a requirement that all members qualify as a Chartered Life Underwriter (CLU), Certified Financial Planner (CFP) or certain other generally accepted professional designations.

• Market Conduct: Advocis maintains standards of market conduct through the enforcement of a Code of Professional Conduct and the development of practice standards. Advocis enforces its Code through a process of supervised peer review and sanctions.

• Public Affairs: Advocis participates in the development of policy and regulation affecting financial advisors and their clients before all levels of government across Canada.

Advocis is a voluntary self-governing national association that is dedicated to serving the needs of professional financial advisors who aspire to achieve standards of proficiency and conduct that exceed the common denominator of regulation.

Scope of Submission—Governance Provisions for Policyholders

Our comments respond to proposals contained in Chapter 3 of the paper, "Governance Provisions for Policyholders", in the order in which they are presented.

We have asked knowledgeable practitioner members of Advocis to consider the proposals. This letter conveys the comments provided by our respondents.

The overriding tenor of the comments we have received is that existing measures in the Insurance Companies Act are sufficient to protect policyholders and that the justification for change is far from evident.

A recurring theme in the comments is that, while it is desirable to modernize the Insurance Companies Act following reforms to the Canada Business Corporations Act, it is a mistake to equate policyholder rights with shareholder rights. This thought is elaborated below on page 3, under "Policyholders’ Proposals in Mutual Companies".

I. Direct Participation of Policyholders

1. Right of Policyholders to Vote in Mutual P&C Companies

We are skeptical about the benefits that would arise from extending votes to all policyholders with one hand while, with the other, excluding owners of policies of an unspecified short duration or that fall below an unspecified premium value. Our consensus recommendation is to maintain the status quo.

2. Policyholders’ Proposals in Mutual Companies

a) Number of Signatures Required for Circulation

b) Circulation of Proposals on Ordinary Affairs or a Change of Corporate Direction

It is a mistake to equate policyholder rights with shareholder rights. The two differ significantly. At a basic level, shareholder rights are transferable. They can be bought and sold. Shareholders take a risk on the corporation and expect a share of the profits of the corporation in exchange for this risk.

Policyholders’ interests are not transferable and generally encompass the interests of parties across more than one generation in addition to the owner. Whereas shareholders want high growth rates, policyholders would best be served if no new business were written.

The current checks and balances for circulating policyholder proposals and appealing a refusal to circulate a proposal appear to be working properly.

Reducing the number of signatures required for the various proposals would invite nuisance proposals and incur wasteful expenditures, to the detriment of the majority of policyholders.

We prefer to maintain the status quo. We oppose the proposal to require any category of proposal on the strength of only one signature. Five signatures would be an absolute minimum.

3. Policyholder Votes and Proposals in Stock Companies

For some stock companies, the par policyholders represent a significant portion of total votes, even if the sales spectrum is now shifting away from new par sales.

Our recommendation is to maintain the status quo for at least five years.

With regard to the proposal to reduce the number of voting policyholders that are needed to bring forward proposals in stock companies, we also prefer the status quo. If any change is to be made, it should be to increase the number of required voting policyholders.

4. Form of Proxies

We are not aware of a need for change.

5. Request for Special Meetings

Again, the current provisions appear to be working well, with no evident need for change. The current generation of policyholders would be best served by not investing in new business. By reducing the signatures required, a special interest group of policyholders could conceivably put a company out of business.

We therefore again recommend in favour of caution and against change.

II. Participation of Policyholders' Directors

1. Number of Policyholders’ Directors

Our respondents are equally divided between maintaining the status quo for at least five years—policyholders’ directors constitute a minimum of one-third of the board of a stock company—and reducing the number of policyholders’ directors to the lesser of one-third and four directors.

2. Qualification of Policyholders’ Directors

Again, our respondents are equally divided. Half support the option to prohibit policyholders’ directors from holding shares in an entity controlling a company on whose board they serve, to eliminate the possibility and the perception that the director for policyholders who is also a shareholder may be in a conflict of interest. Half support allowing a policyholders’ director to acquire an economic interest in the company that the director is obligated to supervise, subject to the same fiduciary obligations as other directors of the company.

3. Policyholders’ Affairs Committee

The establishment of a mandatory policyholders’ affairs committee to safeguard the interests of par policyholders appears to be redundant if, as one assumes, the directors at large are carrying out their obligations. Our respondents have voiced no support for the concept.

III. Par Accounts and Adjustable Policies

1. Par Accounts in Mutual Companies

The paper proposes to abolish requirements to maintain par accounts in mutual insurance companies, while retaining measures respecting disclosure of dividend policies and annual dividends for all mutual companies with participating policies.

Respondents express a preference for retaining the status quo, if only to preserve vital information that may be valuable in future circumstances. One respondent observes that existing commercial forces have established an equilibrium with the regulatory status quo: competition is forcing companies to disclose more information on the management of their participating accounts, at the same time as fewer life insurance companies are manufacturing par products.

2. Management of Par Accounts

We support the proposal to require companies to provide their par policyholders annually with more and specified information about the management of par accounts.

3. Seed Money

Again, the views of respondents are divided.

One view is that the par account should be allowed to invest in a segregated account. That may be the only means to invest in certain asset classes. OSFI has sufficient powers to prevent a company from abusing this ability as a strategy to transfer par profits to the profits of shareholders from the operation of the segregated fund accounts.

The opposing view is that allowing a stock company to use par funds as seed money for segregated funds is inappropriate if no consideration is paid to the par fund. Even if consideration for the use of the par funds, allowing the practice could have the effect of distorting decisions about the level of dividends that should be paid to current par holders.

4. Duties of Directors Regarding the Par Account

The paper proposes alternative measures to require directors of stock companies either (1) to consider the interests of par policyholders when fulfilling their functions in relation to the par account or (2) to act in a manner that is fair and equitable to par policyholders in respect of the par account. Our respondents tend to conclude that both proposals are redundant with the existing fiduciary obligations of a director, especially the duty to balance the competing interests of the stakeholders in a life insurance company.

Nevertheless, should one of the proposals be adopted, our respondents express a slight preference for the second proposal.

5. Policy Dividends

No comments.

6. Adjustable Policies

These proposals appear to apply to policies issued 10 to 15 years ago that re-priced the premium or other values of the policy every five years or so. As such, those values were not guaranteed.

However, the description of "adjustable policies" that is set out in the paper could also include current universal life policies. If so, the proposals would require the company directors to approve each credited change of rate for a universal life policy. This would be impractical, since rates may be changed weekly or even daily. We therefore infer that the proposals are not intended to apply to current universal life policies.

Our respondents tend to conclude that specific corporate governance requirements in respect of adjustable policies are unnecessary. The company will be held accountable for its repricing in the marketplace through competitive forces. If repricing is too onerous, healthy lives will requalify at current market rates. If it is too generous, profits will suffer.

One respondent believes that the existing fiduciary obligations of a director to balance the interests of stakeholders in the company are sufficient to protect owners of adjustable policies. Another believes that the interests of those policyholders not comparable with those of par policyholders. Therefore, the underlying premise that adjustable policyholders require comparable legislated protection is in error.

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We trust that the Financial Sector Policy Branch will find our comments to be helpful. On behalf of Advocis and its 17,000 members, thank you for this opportunity to participate in the development of corporate governance provisions for the policyholders of Canadian life insurance companies

Yours very truly,
Ed Rothberg