Selling insurance and fraud: The Thibault Case

InsuranceAbout the Canadian Council of Insurance Regulators


In 1998, the mother Catherine Audet of Pierre and Marie dies and each one of them receives $1.5 million partly coming from a life policy of $2 million sold by Thibault. They ask Jacque Andre Thibault, a licensed financial advisor who dealt with their mother to become their advisor and to execute an investment strategy on their behalf. Three years later Pierre has no money left and Marie has $680,000 left.

Marie claims about $1 million from Thibault and Pierre claims $1.5 million. They also make a claim against Transamerica for about $240,000 and $275,000 respectively.

Insurers provide life agents and fraudsters such as Thibault the tools necessary to build the level of deceit necessary to sell their life insurance products. These insurers then make the victims of this deceit sign a disclosure page stating nothing presented by the fraudster is guaranteed. Because nothing is guaranteed, nothing has to be real; perfect opportunity for frausters such as Thibault to go on a fraud ramplage while being paid huge commissions by insurers...

On Financial Planning

Richard Proteau

The Facts:

Marie is 38 and she only earns $38,000. Pierre makes $50,000. There is already a life policy of $2 million on Marie taken by their mother in 1996 and transferred at her death in 1998. Thibault sold Marie and Pierre more insurance but to keep it simple we will focus on Marie

  • 1. In 1998, Thibault sells a $2 million policy from Aetna with premium of $45,000 sur 10 ans
  • 2. In 2000, Thibault sells a $9 million policy from Transamerica with premium of $200,000 for 5 years
  • 3. In 1999, Thibault sells a $2 million for each of her 2 kids with total premium of $20,000 for 10 years.
  • 4. To pay for all of this, Thibault uses a very aggressive investment strategy putting all of the money in the Japanese market Nikkei using segregated funds of Transamerica with the ability to withdraw 10% without any charges.
  • 5. The choice of a segregated fund has disastrous fiscal consequences as distributions are taxed as income and not capital gains for Transamerica when he was used selling Maritime Life which treated distributions as capital gains and not income.

Thibault Fraud against Empire Life, what are the concerns?

The Results

  • 1. The Audet win their action against Thibault
  • 2. The Audet lose their action against Transamerica
  • 3. The Audet lose their action against Llyods


In this paper, I will only discuss why the Audet lost against Transamerica. I agree with the decision against Thibault (he was guilty as hell) and the decision against Llyods where insurance covers errors and omissions and not acts of frauds.

The lawyers for Audet concentrated their strategy on demonstrating that Transamerica committed a fault against the Audet by not meeting their obligation to ensure that advisors selling Transamerica understand the fiscal treatment of their products. Their strategy did not address the life insurance policies sold. It is therefore not surprising that they lost. Was it the result of the expertise they received?

If I had been the expert on this case, I would have advised the lawyers to concentrate solely on the insurance. There are serious deficiencies resulting from the sale and issuing of this insurance by Transamerica and this needed to be raised in Court. These questions are:

Is the insurance void or voidable?

This question is not even asked by the tribunal. If Marie Audet had died would Transamerica have paid the death benefit considering that Thibault put on the application $750,000 of income when she had stopped working and had no income.

If the insurance was voidable, did Transamerica had a legal obligation, with the insurance never having existed, to repay the premiums paid.

Also it is clear there was no insurable interest. Was the policy legal?

Was Transamerica negligent in issuing the $9 million policy?

To issue a policy, the application must go through underwriting with the sole purpose of this process to determine whether or not the applicant is insurable and if there is an insurable interest. For most of us, the policy is issued solely on a declaration of income. However for an amount of $9 million, when there is already $4 million on the insured, the standard is a financial inspection done on the applicant usually by Greengrass.

How could they not know that Thibault had lied on the application? Were they negligent? This question is not raised?

Was Transamerica negligent in issuing $2 million on each child?

If I had been the expert, I would have informed the court that $2 million represents 4 times the maximum insurance allowed on children. In my career I was able to go above the $500,000 but there was inspection after inspection to justify that amount. This insurance should never have been issued. Was Transamerica negligent?

Did Transameria help the advisor Thibault in lying to the Audet?

What I would have noticed as an expert is that all the illustrations done by Thibault such as for Aetna were done at 7%. For Transamerica it is done at 8%. Why? Is there a link to the fact that Transamerica introduced a Universal Life that used a conditional bonus based on a 8% illustrated rate (about 10 to 11% real rate of return). So if you earned 10% and more in a year you get the bonus. But if returns fall below that rate, you don’t get it. To get the 10% and more Transamerica knew that the client had to invest in equity. Therefore the client had to take risk and face volatility. As a result, a good outcome would be to achieve 10% return 50% of the time and therefore get the bonus 50% of the time. Transamerica knowingly created software illustrating the bonus being applied 100% of the time. This created unbelievable cash values that could be used to convince people like the Audet to buy insurance they did not need. Transamerica wholesalers knew it, advisors selling Transamerica knew it but they still use this product misleading thousands of clients. (The same applies to National Life)

Canada is moving towards a financial retirement crisis and its solution is to limit the availability and efficiency of possible product solutions that would enable Canadians to receive an income guaranteed to age 100… Why is this not generating a lot of backlash?

This shows how little comprehension Canadians have of financial and retirement planning and how powerful the insurance lobby is. When the insurance lobby say to the Finance Minister to jump you can bet he will jump. Do you believe that a financial advisor at the bank paid on commission and subject to sales quotas that he has to meet if he wants to keep his job will tell a consumer: “Sorry but what you need is an annuity and not a risky mutual fund? So I will send you across the street to the insurance company and tell the advisor you need an annuity and to spend wisely the commission I would have received if I had sold you something we are allowed to sale. In fact, I better start looking for a new job.”

Is there a solution?

In fact, there is a legal precedent for banks to sell annuity-like products in order to provide a more competitive industry and level playing field. When mutual funds were introduced, insurance could not sell mutual funds. As a result they got a dispensation, where they were able to sell this product with the condition that it had to have a guarantee/insurance element (mortality component). This product was called a segregated fund.

Should the Federal Government make the same dispensation to the banks in order for the banks to sell annuity-like products? This could be easily done while protecting the separation of banking and insurance.

How could this be done?

This is why we have reinsurance companies. The business of reinsurers is to purchase risks such as mortality. We could therefore allow the banks to offer annuity-like products making it contingent through an act of legislation that 100% of the mortality risk be ceded to a federally or provincially chartered life insurance company. With the risk fully ceded, no reserves requirements exist for the banks to provide for future mortality. The bank is only responsible for the investment risk which they can retain. The mortality or the insurance is now with an insurance company falling under government regulations and supervision. By doing this the separation of the insurance and bank business has been kept separated.

Would such reinsurance render these annuity-like products non-competitive? I don’t believe so but we will never know until banks can offer such products. Canadians need access to better and more efficient financial products. The ban of annuities is not a way to achieve this!

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Thibault Fraud against Empire Life, what are the concerns?

Is licensing protecting consumers? Or should the consumer be better protected in a “buyers beware” approach to buying life insurance. The Thibault case is raising some serious questions and concerns with the consumers. You will probably tell me that it is unfair to condemn an industry for the actions of one individual. “You don’t save a tree by killing the forest…” You are right! However the consumers are not concerned by the actions of Thibault. Fraudsters will always exist in any industries. Consumers as a result judge the integrity of an industry based on how this industry addresses the fraudster and the people who helped him. The frauds committed by Thibault could not have been committed by himself alone.

He needed to (1) first be licensed, (2) have regulators and insurers look the other way and (3) have employees such as underwriters and sales directors helping him and facilitating the transactions where Thibault was involved in contravention with the procedures established by the insurers to protect the consumers. This association between the employees and Thibault was never investigated. In fact can it be investigated objectively when insurers and regulators may share a responsibility which could cost them millions of dollars if the victims of Thibault understood what really happened? To demonstrate this we have recreated the time line of the Thibault frauds. This timeline is critical since it raises some serious questions that have yet to be answered.

Thibault Fraud Timeline

  • 1981: Thibault is agent of Colonia selling COLSPOL policies.
  • 1981: Purchased policies COLSPOL on himself and his wife.
  • 1981: Thibault sells policy to Lacroix.
  • 1985: Thibault offers a bribe of $1 million to an employee of Colonia named Oliver to falsify values of his policies in order for him to leverage several millions out of these policies with TD Bank. Oliver accepts the bribe.
  • 1991: Thibault buys policy of Lacroix.
  • 1997: Empire buys Colonia
  • 1997: Oliver resigns from Empire/Colonia
  • 1997: Wayne Slimmon employee of Empire and previous assistant to Oliver takes over and continue supporting Thibault with his fraud
  • 1998: Thibault sells large Transamerica policies to the Audet falsifying their income and using an aggressive investment strategy based on Maritime Life seg funds invested in equity. Illustrations are done at 8%.
  • 2001: Financial Director at Empire Michael Schneider discovers irregularities with Thibault policies
  • 2002: Slimmon is fired by Empire
  • 2002: New cash values are communicated to TD Bank and Empire assume responsibilities for the collateral shortfall with the loans.
  • 2002: Thibault sues Empire
  • 2003: The Audet proceed with complaint against Thibault at la Chambre Financiere and a trial takes place during that year. Strangely the trial is not about the insurance falsely issued by falsifying the income of the Audet. Thibault is found guilty of 4 minor charges 1) of having used the term paidup in selling Trans policies, 2) of not knowing that Maritime Life taxed its seg funds differently than the rest of the industry, 3) having pressured the Audet in taking the policies and 4) of having put his interest ahead of his client
  • 2003: Thibault is sanctioned by Chambre Financiere to pay $18,000 fine and a suspension of 1 year
  • 2004: Empire answers lawsuit by Thibault with a countersuit
  • 2006: Thibault sells large life policies from AIG where income of the insured is misrepresented and where illustration rates are done at 11.75%
  • 2007: Thibault appeals judgment of Chambre Financiere and partially wins with judge Bourduas reducing his sanction to 6 months (Note: Since la Chambre Financiere never charged Thibault for the severe infraction of falsifying an insurance application, judge Bourduas had not other choices to only review and consider the less severe infractions)
  • 2009: AMF finally acts against Thibault but strangely only restricts him in his ability to be principal of his agency. He is left unrestricted and unsupervised in his role as agent.
  • 2010: The Audet sues Thibault, Transamerica and Llyods for their losses
  • 2010: Audet wins judgment of $1.4 million against Thibault but loses against Transamerica and Llyods
  • 2011: Empire wins judgement of more than $12 million against Thibault
  • 2013: Thibault enters bankruptcy for more than $70 millions
  • 2014: Chambre Financiere suspends Thibault for 11 years

Consumer’s concerns about the time line:

1. It was already known in 2002 by the investigation conducted by Empire that Thibault had committed an unbelievable act of fraud. Why is it that no regulators were involved? Upon cancelling Thibault agent contract did Empire informed the regulators or their suspicions? If Empire did inform the regulators why did they not take any actions? This would have prevented all frauds that occurred after 2002.

2. The first infraction of Thibault was in 1991 when he bought the policy of one of his client. Again why was this change of ownership allowed and not investigated?

3. In 2003, finally Thibault is the subject of a complaint of the Audet. Audet specifically declared that falsifying the income of his clients on an application was one of Thibault standard practices. This was not investigated by la Chambre Financiere and no charges were brought against Thibault relating to this matter. Also la Chambre Financiere should have known about the fraud committed by Thibault against Empire. This was never mentioned in the trial which would have resulted in a greater sanction and would have made it difficult for Thibault to appeal the sanction. As a result, Thibault was only found guilty of small charges that could only resulted in small sanctions. Why did la Chambre Financiere failed to do its job in 2003 when this could have prevented Thibault from defrauding new victims after this date.

4. Transamerica cancelled the agent contract of Thibault but Thibault was able to secure a new agent contract with AIG and Canada Life with Thibault doing most of its sales with AIG after 2003. AIG knew about Thibault’s past about falsifying income in order to get the insurance company to issue large policies. However AIG did not take any precautions or steps to prevent Thibault from doing this again. Why? How was these policies issued when any reasonable person would have known these death benefits amounts were not justified? Did Thibault again offered bribes to employees of AIG such as underwriters to get these policies issued?

5. In 2003, Thibault was illustrating at 8% which was not reasonable in order to take advantage of the fraudulent illustration values produced by the software of Transamerica at that rate of return. In 2006, Thibault was illustrating with AIG at 11.75%. No other companies would have accepted these illustrations not at a time when I was educating and forcing advisors to illustrate using a 5% rate of return. This clearly shows that someone at AIG was facilitating and helping Thibault.

6. It is only in 2009 that the regulator, the AMF, issued a sanction against Thibault. Using the probity section of the law, the AMF restricts the license of Thibault. Amazingly the AMF only restricts Thibault in being a principal of an agency. Despites all the frauds so far committed by Thibault, the AMF does not restrict Thibault’s ability to sell insurance when it could have easily done by deciding that Thibault did not have the probity to be an advisor or that he was required to be supervised. Why was the AMF protecting Thibault?

An industry not willing to be responsible:

For the consumers these questions raise a lot of concerns. The reasons the victims were defrauded was because Thibault was a licensed advisor who was paid enormous commissions up front if he sold large policies. If this heap commission had not existed, the victims would have not been defrauded. This is undeniable. As a result, would the customer be better protected by dealing with salaried employees when purchasing insurance? When AIG was contacted by one of the victims to get relief on the policy sold by Thibault through AIG, a VP at AIG laughed at the victim. Is this the hallmark of a responsible industry?

What about the regulators?

We have to question ourselves about the conduct of the regulators and the length of time they took in investigating Thibault. Still today the regulators have not charge Thibault with falsifying the income on the applications and they have not investigated how Thibault was able to have certain underwriting rules overlooked in order to have these policies issued. We can only note that the regulators have done everything in order not to charge Thibault with any frauds. Is this linked to the fact that if Thibault had been charged with fraud, the regulator would have had to indemnify the victims which would have cost the Indemnity Fund more than $50 millions… The regulators have now told the victims they were not entitled to compensation because they are past their prescription date…Is there a conflict of interest here?

The victims become criminals

A lot of victims of Thibault are afraid to come forward. In fact the scheme employed by Thibault was very effective by making his victims complicit in his crimes. He did this by using the enormous amount of commission he received where he returned a little part of this commission to his victims. No member of the public would know about the Act pertaining to the distribution of financial products and services. As per the title of this Act, it applies to people and organizations involved in the distribution of financial products and services. As a result, the public would have no motivations to read or learn about this Act since it does not apply to them. This is almost true except for one article of this Act which states that anyone who is not licensed and receives part of the commission resulting from the sale of life insurance is guilty of an infraction to the penal code. Someone receiving a return of commission based for example on the explanation that the insurer is paying too much commission and the advisor does not feel right in accepting such a large commission, this victim would not think a moment that he is committing an infraction in accepting commission which comes from the premium he has paid… You can therefore imagine the reaction of these victims of frauds who also learned they were victims of entrapment by Thibault.

It is clear that this section of the Act must either be removed or changed in order to encourage victims of frauds in coming forward. We should not prosecute victims of fraud… As a result, the Financial Services Consumer Alliance intend to lobby the government in order to change this Act.


Did the Canadian Society of Actuaries buried the Thibault Fraud?

I have already established how Thibault could have been stopped in 2002 after it was uncovered that Thibault had bribed an actuary of the name of Clifford Oliver in falsifying the cash values of certain life insurance policies so that he could obtain fraudulently collateral loans from the Toronto Dominion Bank.

Also at the same time, a client of Thibault was suing him and won. In the lawsuit we learned that Thibault commonly falsified the facts such as income of the applicant to justify the sale of excessively large insurance policies. These were all known facts but Thibault was allowed to continue selling insurance and was courted by executives such as Peter MacCarthy CEO of AIG who seemed more interested in getting his sales up than protecting the consumers.

We have to ask ourselves a question. Were the actions of Thibault not addressed and hidden because it could damage the insurance industry? Was there a cover up?

Clifford Oliver as an actuary admitted taking a bribe from Thibault and admitted forging numbers. He broke every single provisions of the Canadian Actuary Code of Conduct. Did the Canadian Institute of Actuaries upheld that code of conduct in order to protect the public or did they make this embarrassing situation go away? Here is what the Canadian Institute of actuaries decided to do:

Date: April 17, 2013

: Notice to the CIA Membership: Situation involving a former member of the Canadian Institute of Actuaries – Mr. Clifford Oliver

Document 213021

The CIA Board is hereby informing the membership of a situation involving a former member of the Institute, Mr. Clifford Oliver.

In 2012, the Institute became aware of this situation from court documents. Following a review of this situation, including the current status of the member, the costs of taking the matter through the Institute’s disciplinary process, and the potential penalties that could be imposed, it was decided that the best way to proceed in light of the circumstances was to enter into an agreement with Mr. Oliver. The Committee on Professional Conduct entered into discussions with Mr. Oliver, successfully leading to a formal agreement signed by him and by the Executive Director on behalf of the CIA Board. In the late 1990s Mr. Oliver was involved in the fraudulent activities undertaken by Monsieur Jacques-André Thibault in relation to Empire Life Insurance Company (“Empire”). Mr. Oliver was enrolled as a Fellow of the CIA at the time the fraudulent activities took place in relation to Empire. Judgments were rendered on this matter by the Superior Court of Québec in Empire, compagnie d’assurance-vie v. Thibault (2011 QCCS 3536) and by the Québec Court of Appeal in Thibault v. Empire(L’), compagnie d’assurance-vie (2012 QCCA 1748), and an Endorsement was rendered by the Ontario Superior Court of Justice (Court file no. 02-CV-228252CM1). Mr. Oliver had testified before the Superior Court of Québec and the Ontario Superior Court of Justice, admitting to having accepted payment of sums of money from M. Thibault in exchange for inflating certain actuarial values in relation to policies held by M. Thibault. It is our understanding that Mr. Oliver has not, as of now, been the subject of civil or criminal action in relation to this matter. During the discussions with Mr. Oliver, he confirmed that he has not been enrolled as a Fellow of the CIA since 2004, is no longer providing actuarial services, and does not intend to return to actuarial practice.


New lawsuit against Peter McCarhty?

When Jacque Andre Thibault started to sell the life insurance products AIG, he had quite a track record of infractions and fraud with Empire and Transamerica. Any diligent insurer would have refused to give him a contract or would have put in place stringent oversight to ensure no more abuses and infractions is committed by Thibault.

Instead Peter McCarthy, then-CEO of AIG and now CEO of BMO Insurance (BMO acquired AIG April 1, 2009.) welcomed Thibault with open arms giving him free range to prey on consumers in order to boost the sales of AIG.

There was absolutely no oversight over what Thibault did when selling AIG products. In fact, regular procedure and compliance that other insurers would have applied when receiving large life applications from an agent were not applied by AIG. Thibault was allowed to produce illustration at impossible rate of return making his illustrations looking so good that they were selling like hot cakes. When these illustrations were received by AIG, everybody there looked the other way.

But in 2008, clients started to understand they were duped by Thibault and one client named Jacques Duval who was a well-known automotive columnist in fact complained in January 2008 to AIG Life of Canada about Thibault, stating, “It is extremely urgent that Mr. J.A. Thibault be brought to order” and asking that his policy be cancelled and premiums refunded.

Parrott, then an assistant vice-president and ombudsman at AIG proceeded in defending Thibault and his fraudulent illustrations stating: “the arrangements you have made appear to be well-founded.” That how crooked the people working at AIG under Peter McCarthy were!

But it gets worst. AIG happy with the large amount of sales that Thibault was bringing in was willing to do anything for him. This is what we learned in the lawsuit of David Hebert aagainst BMO Insurance, CEO Peter McCarthy and his two vice-presidents, Daniel Walsh and Caron Czorny. We learned that when Thibault unhappy with Hebert asked that they destroy his career, CEO Peter McCarthy and his hounds were too happy to oblige. They are now all denying it but the proof is there.

This is why we have give Peter McCarthy the 2017 Insurance Quack Award!


New lawsuit against Peter McCarhty and cronies?

David Hebert was a Vice-President of a MGA named BBA. That MGA had a contract with AIG. In 2010, there is a conflict between Hebert and Thibault about money that Thibault believes he should be receiving. When Thibault does not get satisfaction he made threats against Hebert stating he would destroy Hebert’s career.

Well it seems that Thibault was able to get the help of Peter McCarthy and cronies. Suddenly five clients of Hebert made a complaint against him stating that they had never met him which would be a grave infraction. Then Daniel Walsh, VP of Business Development at AIG/ BMO contacts BBA to discuss these letters and suddenly Hebert is dismissed from BBA. Interestingly enough AIG/BMO cannot find these letters. They were lost which cannot happen; not 5 different letters. Letters are scanned. How could they be lost? We see that a bunch of liars are running AIG/BMO.

Another interesting fact is that all 5 clients in 2010 confirmed that they in fact knew Hebert.

In this case it is lies after lies from AIG/BMO such as McCarthy having lost all memories of the incident when he wrote several emails that led to Hebert dismissal to Hebert and he also can’t remember having participated in the discussion regarding the complaint letters of the 5 clients of Hebert.

McCarthy and cie represents the culture of the life industry. Would you trust this industry?


How did Thibault with the help of AIG/BMO use Universal Life as instruments of deception?

CHLIA defines the purpose of illustrations as: “This Guideline reflects the principles of CLHIA’s Consumer Code of Ethics including: “To ensure that Illustrations of prices, values and benefits are clear and fair, and contain appropriate disclosure of amounts which are not guaranteed.” And “To advertise products and services clearly and straightforwardly, and to avoid practices which might mislead or deceive.””

This CLIA guideline is what must be used to see how Thibault fraudulently sold Universal Life polices with the help of AIG/BMO.

The illustration is the primary tool used by insurance agents to sell Universal Life policies. With the illustration, the agent is able to demonstrate to the client who his cash values will grow over the year moving the topic of discussion away from the cost of insurance to the topic of investing.

However Universal Life illustrations are tools of deception. . In this context, UL illustrations are marketing fool’s gold. They delight the senses while offering little value and showing little truth.

1. With the help of AIG/BMO, Thibault was allowed to use impossible rate of returns.

Through courts documents, we learned that AIG/BMO allowed Thibault to present illustrations using a rate of return below 11 to 12% to convince the clients to purchase the Universal Life. You go on any insurance sites about retirement and investing and they will recommend that you use a rate of return between 5% to 6%. Thibault was allowed to use any type of returns because AIG/BMO does not limit the investment return that can be used in the illustration. 8% is the maximum rate of return that can be used and this is extremely aggressive and the likelihood of achieving 8% is in the range of 1% probability.

Why is this? This is because the Universal Life illustration does not include the Management Expense Ratio which is usually between 3% to 4%. So to earn 8%, the equity market must yield a return of 11% to 12% over the same period (up to age 100). It will never happen. So basically Thibault with the help of AIG/BMO assumed a rate of return of 15% minimum.

2. With the help of AIG/BMO, THibault was able to hide the impat of volatility.

Insurers such as AIG/BMO misrepresent the behavior of the investment that could potentially return 15% by not showing volatility. Basically the illustration will assume you will get 15% very single year for the rest of your life. It is not going to happen. This type of investment does not exist because risk is inherent to an investment to could produce this type of return.

Without going into big mathematics, let’s just use basic math to show this. Let’s be aggressive and assume that the maximum rate of return that the market can product in a single year is 30%. The worst return is -30%. So basically to get 15% your investment move between 30% and -30% and the average of these returns would have to be equal to 15%. The problem is how the potential for loss is greater than the potential for gain. If your investment returns -30%, this means you are behind your illustration -45% (-30-15). To get back and match the values of your illustration at 15%, you would have to earn 30% for 3 years (30-15 = 15) (3*15 = 45). One year of loss takes three year to recover…

3. With the help of AIG/BMO, Thibault was able to misrepresent the tax shelter offered by the Universal Life.

Universal Life is not a tax shelter contrary to what insurers state in their marketing materials. This is want insurer what they say: The surplus monies constitute the “savings” component of your contract and generate interest that accrues tax free. This is lie. In fact the reserve of the policy which includes the cash value is subject to a tax called the Investment Income Tax (IIT) which is a tax of 15%. The federal government has allowed the insured to pay this tax on your behalf without your knowledge. So the IIT is embedded in the Management Expense Ratio (MER) of the investment (about .75%). Since the MER does not appear on the illustration, none is the wiser.

4.AIG/BMO helped Thibault inflate the values of the illustration through the Bonus fraudulent scheme..

The last scheme employed by insurers such as AIG/BMO to facilitate the fraudulent sale of Universal Life is by using a stratagem built around the Bonus of the policy. Basically the bonus is a return of part of the MER. The Bonus appears on the illustration but not the MER. Basically you return something that was not expensed. This inflates the values of a life illustration. This fraudulent stratagem was discussed in details in a meeting between actuaries at a meeting held by the Canadian Socieity of Acturies. It was discussed in this meeting an actuarial strategy defined as “Smoke and Mirrors” where the actuary could design a Universal Life that would overstate the Cash Value and therefore would make the consumer believe that the coverage was cheaper than it truly was. Here is part of the discussion:

Canadian Institute of Actuaries discussion that took place on June 16, 2004 session D3-PD: Managing Universal Life. This session was moderated by: Stephen T. Krupicz (Manulife) moderator and Promod K. Sharma Speaker

“And then there are also detriments in the design which work against the consumer acceptance, and an example of that would be high management expense ratios (MERs). Insurance companies are not typically seen as the place to go if you have money to invest, and the high MERs that companies offer are an example in the consumer’s mind of being out of touch. Now we know why the MERs are high - it is because of the bonuses that are paid to help the illustrations look good. So if you are able to provide a 1.2% bonus with an MER of three percent, if you wanted to have a higher bonus say 1.5%, you just increase the MER by a corresponding amount - smoke and mirrors. Now the reason this works is that when comparisons are run they are usually at the same projected interest rate, so differences in MERs are ignored, and differences in crediting practices are also ignored. So, using the example if your MER is 3% and your bonus is 1.2%, the effective MER is 1.8%. So if you are trying to do a fair comparison at 6% for a product with a bonus, then the product without a bonus should really be run at 7.2%, and that is not typically how comparisons would be run.”


Thibault Fraud: What stands between fraud and error and omission insurance ?

The answer is nothing! There is whole territory when dealing with an insurance agent where the consumer is left unprotected.

Regulators and the insurance industry are quick to promote the fact that to sell life insurance an agent must be licensed in order to protect the consumers. An example of this protection is the requirement for a licensed life insurance agent to carry error and omission insurance. As a result, if the agent commits an error the consumer is protected and in some provinces such as Quebec, if the agent commits a fraud, the consumer is also protected.

This gives the impression that the consumer is protected whatever happens. This is not true and this was discovered from the lawsuit Audet versus Thibault. In the lawsuit, the Audet won a judgment of more than $1 million against Thibault. But this is not what they wanted sine they knew they would never see a cent of this money which was true since soon after this Thbault declared one of the biggest bankruptcy in Quebec.

Thibault had committed fraud against the Audet by falsifying information on the application regarding the income of the client to justify the issue of a large policy on their live. They should have proceeded on the basis of fraud by making a claim against the Quebec Indemnity Fund but they chose not to. The reason is unknown but it probably because they were aware that Thibault was falsifying their life application.

They instead chose to proceed on the error that Thibault made regarding the taxation of segregated funds that were used to pay the policy. Thibault had made a grave error and it is this basis that the Audet added the Lloyds insurance on their lawsuit as a defendant asking they be indemnified under the error and omission of Thibault.

Lloyds denied having to pay the claim based on the provision of the error and omission where a gross error by the agent was not covered by error and omission insurance. The term gross error was subject to a lot of interpretation. The judge decided in favor of Lloyds.

As a result, error and omission insurance only cover small faults and offer little protection to the consumer. It’s a whole territory where the consumer is left unprotected. Consumers should consider when employing an insurance agent instead of purchasing the insurance themselves directly with the insurer.


Ashton v. Transamerica:Illustration abuses...


In 1986, M. Ashton bought an insurance policy with a face amount of $250,000 and premium of $2,260 from NN (NN was bought by Transamerica). This policy was a 10-pay and premiums were calculated using an expected rate of return of 15%. The client invested in equity.

Not surprisingly the return of 15% was not achieved and therefore M. Ashton was asking reimbursement of his premiums paid since 1996 claiming that Transamerica did not meet its contractual obligations by not advising that the policy was off track and additional premiums were needed to pay the policy.

The Facts:

  • 1. The illustrations were done at 15%
  • 2. The client was advised that this rate was not guaranteed
  • 3. The NN policy contract states that the company must inform the policy holder if he will not be able to achieve his 10-year premium objective

The Results

  • 1. Ashton won on the question of Transamerica duty
  • 2. Ashton lost the entire case based on the fact that the case was prescribed.


This case shows that just 1 hour with an insurance specialist could have allowed the lawyer of M. Ashton to formulate an argument that could have changed the entire decision of the judge even the prescription date.

1. The duty of Transamerica: while the lawyer won on this question I want to bring all of your attention to this question. Around the industry, it is the position of insurance companies that they have no responsibility to service clients and provide information such as annual statements, lapse notices, renewal and conversion notices. As we can see here this is far from the truth. In fact considering this is probably not a single incident and Transamerica has probably failed its duty to all clients owning this type of product, there may be a way for clients to recover their losses through a class action. In any event, the use of an insurance specialist will help you for any cases in determining the obligations of the insurer as you must not only consider the policy contract but also through which distribution channel this policy was sold.

2. The advisor, M. Chabot: The whole argument was around whether or not M. Chabot told M. Ashton that the rate of 15% was guaranteed. M. Ashton was very candid and told the truth. He was told the rate was not guaranteed. But there was no other issues raised by the lawyer of M. Ashton. The use of an insurance specialist could have prevented that.

3. Did M. Chabot meet his duty of care towards his client? This question was not asked in court. You should always question the rate of return used. 15% should have raised a lot of question. An insurance specialist could have established this rate of return was not appropriate even in 1986. In my entire career having evaluated thousands of insurance cases, the highest rate I have seen was 12%. In addition the court seems to have made the wrong conclusion. It took into account that the advisor presented several illustrations to the client. Based on the premiums stated in the court document I can only assume these are illustrations showing premiums in relation to payment duration. I do not believe there were illustrations showing the impact of earning less than 15% since no premiums shown were higher. This could have changed the whole context of the conclusions of the court towards Chabot.

4. Did the client understand what he was buying: The client mentioned that he agreed to the rate of return of 15% because of high interest rates but he invested in equity? A lot of confusion here. As an insurance specialist and knowing sales, confusion is often used to reduce the importance of a factor. Would you consider a 15% return unless someone convinces you it is probable while shifting the emphasis away that is not guaranteed. Selling is manipulation after all.

5. Was Transamerica diligent through the sales process. An insurance specialist would have pointed to you that the illustrations done at 15% were possibly produced not by the advisor but by the company. Looking at the illustration printout it is highly possible. In 1986, not everyone had a computer. As an insurance company with all of its knowledge in investing, how could this company accept to produce illustrations at that rate? Did Transamerica have a responsibility to produce an illustration at 10%? Was the client misled through the whole sale process. Could this conclusion change the prescription date?