Churning, Twisting and Provincial Rebating Rules

Replacement can help or harm

Replacing coverage is not inherently improper. A client's need may change, an exclusion may no longer be appropriate or a new policy may offer a useful feature. The recommendation becomes problematic when repeated transactions primarily generate compensation or misleading comparisons induce the change.

Churning describes unnecessary transactions driven by the agent's interests, often repeated replacements or use of existing policy values to finance new coverage. Twisting emphasizes misleading statements or incomplete comparisons that induce a policyholder to replace coverage. Terminology can overlap in practice. Identify the harmful conduct instead of assuming that the labels establish mutually exclusive legal categories.

An internal replacement can cause harm even when the insurer remains the same. A client can lose favourable guarantees, incur surrender charges or face a new contestability period without receiving a meaningful advantage. “Same company” does not answer whether the replacement is suitable.

Compare what the customer actually gives up

• A proper comparison examines existing and proposed guarantees, premiums, cash values, exclusions, riders and underwriting status. Compare guaranteed figures with guaranteed figures. Do not compare the old policy's guaranteed values with the new policy's optimistic illustration and present the latter as certain.

• Consider the time horizon. A lower first-year premium may rise sharply at renewal. An older contract may have a favourable conversion privilege or a guarantee unavailable in a replacement. Health deterioration can also make new coverage restricted, rated or unavailable. Surrendering the old contract before the new one is effective creates an avoidable gap.

• Suppose a proposed policy saves $20 per month but surrendering the existing contract imposes a $1,200 charge. Ignoring tax and all other differences, the simple recovery period is $1,200 ÷ $20 = 60 months. That calculation is only one component of suitability; new exclusions or lost guarantees may be more significant than the saving.

Recognizing misleading sales techniques

Warning signs include selective illustrations, false claims that an insurer is failing, describing policy loans as free money and concealing the agent's replacement incentive. A loan can reduce proceeds and accumulate interest. Funding premiums through automatic loans may eventually exhaust policy value.

An agent should not falsely disparage another insurer or agent to obtain business. Explain documented differences in coverage and service. A client who asks for a cheaper option should receive an explanation of what changes, not a promise that every replacement improves the position.

Complete the applicable replacement process even when the client initiates the change. Client enthusiasm does not remove the duty to identify replacement, explain consequences and follow required procedures.

What rebating means

Rebating generally involves returning part of compensation or giving a financial benefit as an inducement connected with insurance. Cash, gifts, premium payments and indirect arrangements can raise the issue. Calling an inducement a marketing expense does not determine whether it is permitted.

The common-law module covers several jurisdictions, so a blanket claim that all Canadian life premium rebates are forbidden is incorrect. Provincial law, licence conditions and the insurer's agreement matter. A rebate that is lawful locally can still make a transaction unsuitable or create a misleading impression of future affordability.

BC's permitted limit

BC's published guidelines permit qualifying rebates strictly below 25% of the applicable premium, subject to conditions. “Below 25%” is different from “up to 25%.” For a $1,000 premium, a $200 rebate is 20%; a $250 rebate equals 25% and fails that limit.

The guidelines distinguish the first policy year, when a rebate may be based on the full first-year premium, from subsequent years, when the relevant premium must have been paid before the rebate is given. The insurer's contract must allow the arrangement. The agent must avoid inducing unaffordable or unnecessary insurance, make appropriate written disclosure and address potential tax consequences.

Do not promise a rebate indefinitely as though it were an insurer-guaranteed premium reduction. The agent may not control future commissions or business circumstances. The customer's ability to maintain the actual contractual premium remains part of the needs assessment.

Ontario's different approach

Ontario's current unfair or deceptive acts or practices rule prohibits inducements to purchase, renew or retain life or accident and sickness coverage, subject to the rule's provisions. It also addresses agreements for premiums different from those in the insurance contract. Do not import BC's percentage allowance into Ontario.

The rule recognizes a specific distinction for a good or service reasonably related to reducing the insured risk. This is not a general permission to give any gift that an agent labels educational. Evaluate the actual arrangement under the rule and obtain appropriate compliance guidance before offering it.

A permitted insurer product feature is different from an agent secretly paying part of the premium. Always separate the contract's price from a personal inducement and explain what the policyholder must pay in later years.

Source checkpoint

BC's rebating guidelines explain its conditional allowance. FSRA's current UDAP rule establishes Ontario's different restrictions. Replacement decisions also require the local replacement procedures and a complete, suitable comparison.