A British Columbia regulator has agreed to give the life insurance industry time to come up with its own best standards and guidelines on the insurer-MGA relationship, before deciding whether it should move ahead with its own regulations.
Harry James, director, policy initiatives, at the Financial Institutions Commission (FICOM) in British Columbia, said FICOM was following up on a set of recommendations by the Canadian Council of Insurance Regulators (CCIR) last fall that looked at potential regulatory gaps that might have arisen as the career agency model devolved into the MGA system.
“It’s really the insurer having adequate controls and oversight over the MGA and that the MGA is doing the work prudently,” said James. “If the insurer finds that the MGA isn’t doing the work prudently, then the insurer shouldn’t have a relationship with the MGA.”
FICOM sent out for comment in June a draft set of principles outlining the best practices the regulator expects life insurers to follow when using MGAs as their distributors. The practices basically incorporate the recommendations set out by the CCIR last November.
James said FICOM expects insurers to have a robust and clear strategy when outsourcing to MGAs, understand why they are outsourcing functions, have a clear contract in place that outlines what the insurer expects, provide for the ability to monitor and receive reporting on these functions and periodically reassess the relationship.
The principles also included:<
- An insurer carries out thorough due diligence of each MGA prior to entering into the arrangement to provide services.
- An insurer proactively manages the MGA relationship, including compliance with the contract conditions, once its arrangement with an MGA is in place.
- All regulated parties are responsible to report misconduct, however both parties do not need to report the same incident. The obligation to report misconduct to the insurer should be set out in the MGA-insurer agreement and the obligation for the insurer to report to the regulator is to be respected at all times.
FICOM went a little further than the CCIR paper in saying that insurers must provide some guidance to MGAs on how they should screen and monitor their agents, said James.
He said there was great support from the industry and the MGA side in ensuring there aren’t any regulatory gaps.
“A couple of trade associations for the industry on both the insurer side and the MGA side have been working together and with their members to come up with better practices that will improve the insurer-MGA relationship.”
James said the Canadian Life and Health Insurance Association (CLHIA) notified FICOM that it was drafting its own best practices and the regulator agreed to wait and consider them.
CLHIA president Frank Swedlove said the organization has been working for some time on helping to define the insurer-MGA relationship, adding there will be discussions with regulators over the next few months on the industry’s proposed guidelines.
Swedlove said with 13 different insurance jurisdictions in Canada, it’s important that everyone follow the same set of rules across the country. “This would establish a national standard and have the flexibility to reflect changing market conditions,” he said.
The Canadian Association of Independent Life Brokerage Agencies (CAILBA), which represents the MGAs, agrees with that approach, hoping that all provinces will use the industry standard as their guiding document.
“That is one of the key challenges,” said Arnold Scheerder, a board member and regulatory affairs chair at CAILBA. “We don’t want to end up with a fragmented scenario with different requirements for MGAs.”
Scheerder said all players need to be on side for the guidelines to work.
“Regulation is going to come, like it or not. It’s not necessarily a bad thing,” he said. “The challenge is getting all parties together and having them achieve a workable regulation – that is the key. To me, we need to have a workable solution to address the issues that are stated in the CCIR and FICOM paper. Dialogue between all partners involved will achieve that. Otherwise, the rules aren’t worth the paper they’re written on.”
He noted in particular that it’s important that contracts be clear and reviewed at least annually since many contracts are old and contain vague language with regard to compliance obligations.
In its submission to FICOM, CAILBA also stated its concerns that onsite reviews are costly and time-consuming for MGAs. It requested that the industry adopt a protocol for third-party reviews that would bring about better quality information that is more cost effective and cause fewer disruptions to the day-to-day businesses of MGAs.
The FICOM principles are being welcomed by some MGAs like Credential Financial Inc. in Vancouver. Perry Ceholski, vice president, practice management & insurance at Credential, says his company has been conducting business much the way both CCIR and FICOM have laid out since the company first started in 2004.
Ceholski says Credential, which recently announced a strategic partnership with CUSO Wealth Strategies, has systems in place to screen prospective agents wanting to distribute products, stays in contact with its advisors on a regular basis to ensure they are following regulatory guidelines and checks in regularly with auditing.
Having proper rules in place will give MGAs the credibility they are due as the main distributors of life insurance products in Canada, said Ceholski.
Smaller MGAs, or those who don’t want to go along with any new rules, might well see themselves swallowed up in the ongoing consolidation of MGAs across the country, he said. Credential has its roots in the credit union movement and has about 250 insurance advisors throughout Canada.
“We welcome the additional scrutiny on the insurance distribution industry,” said Ceholski. “We think it’s a long time coming. MGAs shouldn’t be kept in the dark somewhere. They play a very important role in terms of providing advice to advisors and how they do business which in turn provides advice to their clients.”