Industry leaders are hoping that positive changes will result from an ongoing regulatory review of the managing general agency channel. In particular, they believe confusion needs to be cleared away around MGAs’ roles and responsibilities within life insurance distribution.
In April, the Canadian Council of Insurance Regulators (CCIR) publicly released all of the submissions it received from industry stakeholders during the 60-day consultation period after the issuing a paper on the MGA channel in February. The next step will be for the regulators to prepare a report for insurance superintendents with possible recommendations. Many industry stakeholders believe the process will lead to some form of regulation of MGAs that will benefit the industry, as long as the changes do not go too far.
Casey Brandreth, is a member of the board of the Canadian Association of Independent Life Brokerage Agencies (CAILBA) and is responsible for regulation and compliance issues. He is also vice president of business development for Daystar Financial. Mr. Brandreth believes that so far the regulatory review process has been positive.
The MGA review was implemented because the regulators were seeking to know “who are these MGAs that have sprung up all over the place and now account for more than half of insurance distribution in Canada?” he explains.
Mr. Brandreth believes the process will lead to changes such as regulatory requirements for full registration and licensing of MGAs across Canada, as well as proper errors and omissions coverage. “I think that will be a positive. From the regulators’ standpoint, they’ll know exactly who these MGAs are and how to contact them and there may even be a special licensing requirement for MGAs so they can actually identify an MGA versus a corporation. Those are some of the things that might come out of it.”
Jim Virtue, president and CEO of PPI Solutions expects the process will lead to changes, which he hopes will bring improvements. “We feel that this review will result in some changes to the way that insurance is distributed. It is clear that there will be more regulation for both MGAs and the advisors that do business with them. We are hoping that through the consultative process that the regulators are taking, that the changes to the regulation will improve the business, and not simply provide regulation for the sake of regulation.”
In his opinion, a positive result of potential regulatory change would be that it could raise the bar on professionalism in the industry. “A standard code of conduct that is applied to all industry players will likely result in improved consumer perception,” says Mr. Virtue.
Kevin Cott, CEO of Qualified Financial Services says he looks on the prospect of regulatory oversight of MGAs as a positive development as long as it does not go farther than necessary.
“I think that oversight in the industry is beneficial in a financial services environment, so I’m not scared of it…I would say I’m more concerned about regulators going to an overkill because of media and public outcry. I guess the thing that worries people with any kind of change is that people will go from extreme left to extreme right as opposed to finding the right balance in between.”
Terri DiFlorio, president Hub Financial, believes that the CCIR has taken a “very reasonable” approach so far, but she adds that it is both important and prudent for MGAs to participate in this process to help regulators understand where the industry is at right now. This could avoid regulation for the sake of regulation and ensure that any changes are focused in the right areas.
“The one overriding message that you have to bear in mind is that there really is no big, significant issue out there where consumers are not being taken care of because of the emergence of the MGA channel. So, we have to be careful not to try to fix a problem that doesn’t even exist,” she says.
That said, she is looking forward to some possible changes. Like Mr. Brandreth, Ms. DiFlorio thinks there will be, at a minimum, MGA licensing and specific requirements for the E&O coverage that an MGA carries. She also says we may see capital requirements for MGAs.
“I think that things like licensing and appropriate E&O will go a long way in making sure that the people in the business are the right people and they’ve got the infrastructure in place and that if there is an issue down the road, that they’ve got the resources to work through any client complaints and accept liability if there is liability. Personally I would be really pleased with those changes.”
Mr. Brandreth says an aspect that CAILBA likes about the CCIR review process is that the regulators’ approach has been principles-based versus rules-based. MGAs don’t want to end up with a rules-based approach like the Mutual Fund Dealers Association (MFDA), he says. “We don’t think that has been a very successful process, whereas we believe a principles-based approach makes a lot more sense and it’s more in line with the history of the insurance industry.”
He adds that CAILBA is fine with the idea of new licensing requirements for MGAs, “But just to continuously slap on one rule, after another rule, after another rule – it ends up being a dog’s breakfast. So we think from our discussions so far, that it will continue to progress as a principles-based approach.”
Know your advisors
Mr. Brandreth says one principle that CAILBA has discussed with regulators is that of the responsibility of MGAs to know their agents. “What I mean by that is from a business risk point of view, we need to really know who our agents are, do our due diligence prior to contracting our advisors and our agents, and make sure we do the proper background screening of those advisors.”
Ms. DiFlorio says that one of the major questions raised by the CCIR in its issues paper was if advisors are not doing business with one MGA or one carrier, who supervises them? “So, in response to that issue I think you’ll probably see some sort of a database for client complaints or disciplinary actions where there can be one source that people can look to, to try to determine the suitability of a particular advisor.”
Such a database could be used for querying to see whether there have been any issues on a particular advisor recorded by carriers, the Ombudsman or a provincial licensing body, she explains.
Ms. DiFlorio adds that the MFDA and the Investment Industry Regulatory Organizaton of Canada have already gotten together to form a national database, so it makes sense that life insurers or the provinces get involved with that. “There is really no reason to recreate the wheel or have information residing in multiple places.”
She adds that a collaborative database would be good for advisors too. “I really believe if there are rogue advisors in the business, that most advisors want them out of the business too.”
Clarity of responsibilities
With respect to insurer-MGA relationships, Mr. Brandreth anticipates that there will be more clarity around the delegation of tasks that insurers may have passed on to MGAs and the insurers’ accountability to ensure these tasks are completed. “One of the things that will probably happen is that insurers will be responsible to actually inspect what they expect of MGAs.”
For example, he says if an MGA recommends a contract to an insurance company for a particular advisor, it’s still up to that carrier to do their due diligence and approve that advisor because the contract is with the insurer. “An insurance company always reserves the right to deny a contract with an advisor.”
Mr. Brandreth believes the onus on insurers to be accountable over downloaded tasks will lead carriers to conduct more formal audits with their MGAs. This could be an onerous process for MGAs who deal with multiple carriers unless the insurers follow the same process. The Canadian Life and Health Insurance Association has already designed a common template for the auditing process between insurers and MGAs which Mr. Brandreth hopes will be used…We’d like some continuity in this audit process, as opposed to each one of them having a different process in place.”
Byren Innes, senior vice president and director at NewLink Group, a strategic consulting firm for the financial services sector, also thinks clarity of roles and responsibilities is the main issue for regulators to deal with. The regulator should define where responsibility starts and ends at all three levels of distribution: Insurer, MGA and advisors. “You need to come up with that in order to understand what the framework is and how to regulate it. If you don’t understand who is responsible for what, you still have this greyness and how do you regulate greyness?”
To enhance this clarity, Mr. Innes thinks insurers’ contracts with MGAs “should probably be rewritten from scratch to be structured as outsource agreements, i.e., We are contracting with you to perform the following functions in distributing the products of ABC life insurance companies... What that does is allow clarity about what they do and do not do…”
Clarifying what MGAs do not do is important because at the same time it clarifies that someone else is responsible to do it – either the advisor or the insurance company, he adds.
He adds that because their products are long term contractual obligations, most of the responsibility will fall on insurers. “The insurance company will retain a huge amount of responsibility for delivering the ultimate service to the consumer.”
Changes for advisors
What will change from advisors' perspective? Mr. Brandreth says one concern that has been raised is that regulators may oblige advisors to place their business through one MGA only, in the same way that mutual fund reps must work with one dealer.
Mr. Brandreth doesn’t see this happening because the industry consensus is that such a move would be unnecessary and against the interests of consumers.
Perhaps, however, advisors may be required to disclose who their MGA is, he says. “That isn’t something that is a responsibility right now.”
Mr. Cott of QFS doesn’t expect such a change either, “at least not today… I don’t think it will happen because I think there will be too much backlash on that.” One significant obstacle to such a move would be the costs for carriers and MGAs involved in transferring business from one MGA to another, he says.
He also does not see any need for such a change. Thirty years ago when the channel was in its infancy, MGAs would generally have only one or two contracts with insurers. This obliged independent advisors to deal with multiple MGAs. Today, the top 30 or 40 MGAs across the country have six, eight or more contracts with insurers and are aggregating the business of most of their advisors, he explains.
“The average advisor is dealing with, realistically, three or four carriers, so if they have one piece of business that might go to another company, so be it…I think what you’re looking for is, 'Can I get oversight with respect to the majority of their practice?'” (See more on this issue on page 24)
In general, Mr. Brandreth of CAILBA says he has had no indications so far from this review that regulators will bring in requirements that will result in significant changes to business processes for existing larger MGAs. Smaller MGAs, however, which have contracts with just one or two companies, may find it necessary to grow bigger, merge with another MGA or sell their business, he says. “That may be something that comes out of this as well – more consolidation, fewer MGAs, but MGAs that are representing most of the companies available.”
Asked how regulation would impact smaller MGAs, Ms. DiFlorio says the issue is not about big or small, but whether an MGA has taken their compliance responsibilities seriously. If they haven’t, “I don’t think it will be harder for them to do business, I think it will be impossible,” she says, adding, “If you’re in an MGA where you haven’t already set up a compliance infrastructure; if you haven’t taken your FINTRAC, privacy or AML responsibilities seriously; if you don’t have a legitimate back office system in place where you can implement all these things that are required; you cannot possibly afford to catch up now.”
[See also Jim Ruta's column on this issue p. 44]