Insurance regulators are examining the oversight of advi-sors by both product manufacturers and their distribution channels.

The Canadian Council of Insurance Regulators, an umbrella group of provincial and territorial bodies, is reviewing the activities of managing general agencies, the fast-growing distribution channel through which many financial advisors are doing their insurance business. And the CCIR is also examining the way in which the insurance companies supervise the agents that sell their products.

Together, both projects aim to clarify what sort of regulatory regime is watching out for the consumer during a sale by an insurance advisor and whether more oversight is needed.

British Columbia’s Financial Institutions Commission is leading the CCIR’s review of the distribution channel. Industry groups, including Advocis, the Independent Financial Brokers of Canada, the Canadian Association of Independent Life Brokerage Agencies and the Canadian Life and Health Insurance Association are also participating. The CCIR plans to hold formal discussions with the industry in the spring and in the autumn.

Loosely comparable to dealerships in the securities world, MGAs have grown in both numbers and by the volume of their business. Fundamentally, that’s why regulators want to understand MGAs, potentially with the view to licensing or regulating them in some fashion.

NewLink Group Inc., a Toronto-based industry consultancy, has put the number of MGAs in Canada at more than 400, but it’s hard get an exact count because no central registry exists.

“What gave rise to the work was the growth of the channel,” says Grant Swanson, director of licensing and compliance at the Financial Services Commission of Ontario, which regulates insurance agents in the province. “Like a lot of things, as something becomes more important, one takes time to understand what’s involved.”

As of today, no licensing category exists for MGAs; but, from a regulatory point of view, says Swanson, MGAs are no different than a single agent.

He adds that the insurance manufacturer is responsible to the policyholder, with whom it has a contract. But more and more, MGAs are taking on quasi-regulatory roles, and there’s a lack of clarity about their responsibilities.

All MGAs act as conduits for advisors’ business with product manufacturers. The greater the MGAs’ volumes, the better the contracts they can strike with manufacturers. In turn, MGAs pay commissions to advisors. Some MGAs recruit, train and look after advisor licensing; some also keep records of policies; others do none of this.

“The insurance company has become farther from the ground at which the advice is given and from which the insurance is being sold,” says Swanson. “The CCIR is in a fact-finding mode to get a better understanding of [the MGAs’] various functions, just to describe how they fit in the chain.”

The review is “long overdue,” says Byren Innes, a principal and vice president with NewLink: “There needs to be a definition of what an MGA does, its responsibilities and some standards for an MGA. Those should be minimal standards across the industry … they should include technology, compliance, privacy, infrastructure and possibly capital requirements.”

Leslie Byrnes, the CLHIA’s vice president of distribution, says the CCIR review will help explain how MGAs “are structured, their roles and responsibilities, and the degree to which they support regulator compliance.”

MGAs are a varied breed. Some, such as Hub Financial Inc. of Woodbridge, Ont., are well known entities; similarly, each major investment dealer and planning firm owns an MGA. But the smallest among the MGAs may literally consist of one high-producing advisor able to maintain a contract with an insurance manufacturer from a spare room in his or her home.

The MGA channel has grown as insurance manufacturers have put less priority on career sales force, preferring instead to work with independent advisors through MGAs, says Peter Lamarche, CAILBA’s president. He says it has been an open industry strategy to off-load costs and oversight responsibilities to the distribution channel. CAILBA sees the strategy clearly articulated in the contracts that manufacturers write with MGAs, which explicitly demand some oversight of the sales process.

“One of the concerns is that if [regulators] get a client complaint, in the not too distant past, they would go the insurance company because the agent is a representative for that company,” says Lamarche, who is also president of Blonde & Little Financial Services Ltd., a Windsor, Ont.-based MGA. “Now, this complaint can cover multiple products, and companies and the client might not even be aware of the insurance company.”

Also problematic is that most consumers have never heard of an MGA, although they almost certainly have done business through one. Members of Toronto-based CAILBA represent about 75% of all life and health insurance policy volume, but chances are many consumers have never heard of it.

The distribution review is likely to carry on into 2011. Swanson says that it’s common for a set of best practices to emerge from a review such as this, but that’s not officially part of the plan yet.

The review of the product manufacturers’ compliance regimes, also in its preliminary stage, will involve a survey and visit to the major manufacturers and a handful of the smaller, more specialized insurers to get a sampling of their compliance processes. The aim is to establish some best practices that need to be communicated throughout the entire industry.

“We recognize at this stage that it’s not going to be one common approach for every company,” says Swanson. “And so, there will be certain deliverables that any firm has to produce.

“Then, the question is: ‘How do those systems work?’” he adds. “Let’s look at the outcomes — how successful they are in screening situations that represent risk to the public from those that don’t.”

Insurance companies have an incentive to ensure that sales are compliant because they are taking on liability in the end, notes Swanson. In addition to the underwriting standards manufacturers impose, these companies also run compliance departments that cancel contracts with advisors that continually write failed business. Says Swanson: “[Repeated failures are] a good indication that the advice wasn’t as good as it could be.”

But these advisors can always file new business with a different insurer that might have different standards or with which he or she has had less experience.

Unlike in the securities industry, insurance advisors don’t have to complete a know-your-client form to make an insurance sale. The equivalent may be the “illustrations and needs analysis,” but no minimum standards exist for this sort of documentation. And although sales commissions disclosure is clearly supposed to happen, as a rule, the client and advisor don’t sign it — and, as a rule, no firms keep record of it, either.

There seems to be consensus from regulators and industry participants alike that nobody wants to see an MGA version of the Mutual Fund Dealers Association of Canada, which seems to represent an ever-growing cost of duplicate securities regulation.

But it’s worth noting that insurance manufacturers can still sweeten sales for top-selling insurance advisors with exotic sales conferences — the sort of incentive that was snuffed out on the securities side when the MFDA was created.

These sorts of concerns may come under scrutiny as the CCIR reviews the compliance regimes of the product manufacturers.

The CCIR has already implemented a national complaints-reporting system that gives regulators a sense of what circumstances give rise to problems for consumers. This system has been operating since July 2009, but, as of yet, the data are only available to regulators and there are no plans to make the database publicly accessible. IE