Presenting Products Ethically

Table of Contents

 

Chapter 1: Agent Ethics

7

 

    What is meant by product “suitability?”

8

 

Adequate Communication Skills

8

 

Investment Vehicles

9

 

Why is Ethical Conduct Necessary?

9

 

    Is it possible to teach ethical behavior?

11

 

        Psychological egoism/ethical egoism

12

 

    What is the scope of ethics?

13

 

    What does it take to be a moral person?

13

 

        Provide quality work and services / Creating a Legacy

14

 

        Example 1

15

 

        Example 2

16

 

        Example 3

17

 

        Example 4

18

 

    What are our responsibilities to other moral people?

18

 

Required Continuing Education

20

 

Compliance Manuals: ABC Insurance Company Compliance Manual Example

22

 

        Introduction

22

 

        Standards of Conduct

23

 

            Making the Client’s Interests a Priority

23

 

            Applicable Canadian Laws and Regulations / Conflicts of Interest

23

 

            Client Privacy

24

 

            Anti-Money Laundering Compliance

25

 

            Employee Trading in Company Securities

25

 

            Client Gifts and Entertainment Costs

26

 

            Accurate Representation of Agent Expertise

26

 

            Fronting / Coercion and Undue Influence

28

 

            Rebating / Tied-Selling / Misrepresentation

29

 

            Twisting and Churning

30

 

            Induced Lapse

31

 

        Registration and Licensing

31

 

            Insurance License / Dual Licensing for Securities and Life Insurance

31

 

            Continuing Education Requirements

31

 

            Errors and Omissions Insurance

32

 

        Approved List of Insurance Suppliers

32

 

            Scope of Business / Approved List / Foreign Insurance Products

32

 

            Out of Province Clients / Non-Resident Clients / Servicing of Products & Services

33

 

         Points of Sale Requirements

34

 

            Agent of Record for Insurance Applications / Policy Delivery

34

 

            Commissions / Non-Life Licensed Insurance Referral Program

35

 

        Servicing Requirements

36

 

            Updating Insurance KYC / Replacement of Existing Life Insurance Contracts

36

 

            Remittance of Insurance Funds

38

 

        Record Retention (chart)

38

 

            Separation of Records / Cautionary Note on Destruction of Records

40

 

            Records Documenting Verbal Communications with Clients

40

 

            Information to be Documented

40

 

        Complaints, Litigation and Regulatory Inquires

41

 

            Regulatory Inquiries

41

 

Conclusion

 

41

Chapter 2: First Contact

42

 

Setting Appointments

44

 

At the Door

46

 

Communication Skills

48

 

    Identifying Client Goals

49

 

Sales Conduct

 

51

Chapter 3: Product Suitability

53

 

Ability to Save Adequately

53

 

    The Reason for the Goal

54

 

    Changing Circumstances Means Changing Goals

57

 

    Basic Product Information Requirements

59

 

Determining Product Suitability

59

 

    Product Replacement

61

 

    Identifying Suitability Issues

62

 

    It is Not a Liquidity Issue but Rather a Suitability Issue

        Investment Returns / Counterparty Risk

63

 

    A Comprehensive Financial Plan

65

 

Suitability in the Retail Sale of Financial Products (2008 Study)

67

 

    Determining Suitability According to the Report

      (Basel Committee on Banking Supervision International 2008 Study)

71

 

Annuity Surrender Values and Penalties

73

 

    Financially Sound Insurers

 

73

Chapter 4: Product Costs

76

 

Adverse Selection

78

 

Purpose of the Insurance

79

 

Risk Categories (Preferred Best and Preferred)

79

 

Life Insurance Death Proceeds

79

 

The Terms “Insurance” and “Assurance”

80

 

    Term Insurance / Permanent Life Insurance

80

 

    Whole Life Insurance / Universal Life Insurance / VUL

81

 

Life Insurance Surrender Charges

83

 

Taxation / Viatical Settlements

85

 

Annuity Costs

86

 

    Annual Variable Annuity Costs / Less Risk – Lower Yields

86

 

    No-Load and Front Load Commissions

87

 

    Mortality Fees / Investment Advisory Fees

87

 

    Implicit Interest Rate (i%)

88

 

    Delaying Annuitization when Interest Rates are Low

89

 

Equity Indexed Annuity Costs

90

 

    Participation Rates

90

 

    Averaging / Caps / Spreads, Margins and Administrative Fees

91

 

Annuity Surrender Values and Penalties (chart)

 

92

Chapter 5: Anti-Money Laundering

94

 

Abbreviations/Definitions

95

 

Terrorism Produces Insurer Risk (legal, reputational and operational)

96

 

Proceeds of Crime (Money Laundering) and Terrorist Financing Act

97

 

    Object of the Act

97

 

Company Objectives

99

 

    Policy Application

99

 

    Restricted Businesses and Entities / Client Due Diligence (CDD)

100

 

    Due Diligence Requirements for Personal Clients

101

 

    Ascertaining Identification – Face-to-Face

101

 

    Due Diligence Requirements for New Business Clients

103

 

    Confirm the Existence of the Client’s Business

103

 

Collection of Beneficial Owner and Director Information

1003

 

Not-for-Profit Organizations

104

 

Exceptions to Business Client Requirements

104

 

When to Conduct Client Due Diligence

105

 

Enhanced Client Due Diligence

105

 

Third Party Determination

105

 

Politically Exposed Foreign Person (PEP) Requirement

106

 

Retention of Client Records

107

 

Suspicious Transaction or Attempted Transaction Reporting

107

 

Signs of Suspected Money Laundering

107

 

“Red Flag” Indicators

107

 

Large Cash Transaction Reporting

108

 

Mandated Money Laundering Reporting Officer (MLRO)

108

 

AML Education / A Change in Thinking

109

 

    Three Stages of ML: Integration, Layering, and Placement

109

 

Product Identification

110

 

    Permanent Life Insurance Policies / Annuity Products

110

 

    Any Cash Value Insurance Product

111

 

        1.  Single Premium Life Insurance Contracts

111

 

        2.  Early Policy Redemption

112

 

        3.  Claim Fraud

112

 

        4.  Cash Premium Payments

112

 

        5.  “Free Look” Periods on Newly Issued Policies

112

 

        6.  Collusion of Customer Intermediary and/or Insurer Employee

113

 

        7.  Third-Party Premium Payments

113

 

        8.  Risks Involved in International Transactions

113

 

        9.  Fraudulent Customers, Insurers, or Reinsurance Companies

113

 

Money Laundering Indicators Not Unique to Insurance Products

114

 

    Large Cash Transactions

114

 

    Use of False Addresses and Other Information

114

 

    Overseas Business from Higher Risk Jurisdictions

114

 

Characteristics of the Money Launderer

 

115

Chapter 6: Annuities

117

 

Annuity Terminology

117

 

Planning for Increased Life Spans

120

 

    Longevity Risk

121

 

Variable Annuities (Variable Annuities Contain Risk)

121

 

Registered Retirement Savings Plans (RRSP)

123

 

    Section 146 of the Income Tax Act

123

 

    Prescribed Treatment/Non-Prescribed Treatment

124

 

    RRSP Types

126

 

    Contributions

126

 

    Spousal RRSP

127

 

    Taxation of Deferred Annuities / The Decision to Buy

128

 

Life Income Funds (LIF)

129

 

Immediate Annuities

130

 

Annuity Payout Options

130

 

    Single Life Payout Option

131

 

    Joint-and-Survivor Payout Option

132

 

    Installment Refund Life Payout Option

132

 

    Variable Annuity Payout Option

133

 

    Term Certain Payout Option

133

 

Other Products

133

 

    Dollar Cost Averaging

134

 

Beneficiary Designations

135

 

    Contingent Beneficiaries

136

 

The Insurance Contract

137

 

    Deposits

138

 

Surrender Penalties

138

 

Retirement Savings Plan (RSP) Endorsements

139

 

Conversion to Registered Retirement Income Fund (RRIF)

139

 

    Guaranteed Interest RRIFs

141

 

    Mutual Fund RRIFs

141

 

    Segregated Fund RRIFs

141

 

    Self-Directed RRIFs

 

141

Chapter 7: Policyholder Service

142

 

Returning Telephone Calls Promptly

143

 

Yearly Contact

144

 

Requesting Referral Business

145

 

Poorly Performing Products

147

 

Increased Liability

147

 

Liability Risks (Warranty of Authority & Express Authority)

149

 

    Contributory Negligence

152

 

E&O Insurance for Agents

152

 

 

United Insurance Educators, Inc.

8213 352nd Street East

Eatonville, Washington 98328-8638 USA

 

mail@uiece.com