The paper on managing general agencies recently published by the agencies regulation committee of the Canadian Council of Insurance Regulators states that there “is an apparent lack of clarity as it relates to the sales, responsibilities accountabilities and appropriate oversight of the agent, the MGA and the insurer.” The CCIR paper, when read as a whole, makes it clear that the “lack of clarity” is manifest in many ways, not simply apparent.
It’s unfortunate, from a public interest perspective, that the widespread development of MGAs as a distinct distribution channel that has been a significant part of the insurance industry for quite some time has seemingly not resulted in a comprehensive fact-finding mission by insurance regulators until now. One can only imagine how long the results of this mission will be studied before any proposals will be floated and adopted in some form or another, with perhaps unexplainable variation from province to province. The passage of more time will make the adoption of needed reforms intended to address the public policy issues arising from the explosive growth of MGAs more difficult as many stakeholders who have organized and capitalized their operations to conform to today’s regulatory regime will resist change based on their own inertia and the costs associated with such reforms.
In the interest of helping the insurance industry and the regulators amend the legislation to reflect the changes in the industry, the following approaches could perhaps stimulate discussion now. The CCIR paper is clear that MGAs are of two types: those that provide purely administrative services; and those that, in addition, undertake certain activities on behalf of insurers.
Provision of administrative services should not concern regulators but rather be a question of contractual arrangements between MGAs and insurers. Outsourcing guidelines that address risk are already in existence and, if needed, could be modified to deal with the outsourcing of administrative functions. Liability for improper provision of administrative services would rest with the insurer or the agent for whom an MGA is providing such services. Such administrative MGAs do not act as “insurance agents” in any traditional sense. For clarity, these MGAs should be referred to by another moniker that can be easily recognized by the public (perhaps “service providers”) — as distinct from a “seller of” or “provider of insurance products.”@page_break@With regard to MGAs that provide alternatives to the traditional career agent model, there are at least two models that could ensure clarity with regard to MGAs’ responsibilities. The first would see insurers as the manufacturers of insurance products, with the sole responsibility of dealing with claims, while the responsibility for distributing the products rests with the applicable distribution channel. This approach is logical as the insurers, other than in the case of career agents, are not in the best position — or, perhaps, in any position — to monitor market conduct by individuals who are not in their direct employ. As an individual salesperson can now sell products from a number of insurers, no insurer can oversee the actions of an individual salesperson in a comprehensive manner.
Alternatively, in the situation in which an MGA has accepted supervisory, training and non-administrative responsibilities on behalf of an insurer or insurers, it should be absolutely clear from the consumer’s point of view, regardless of any contractual arrangement (including cross-indemnity provisions), that the insurer is responsible for the actions of the MGA and its salespeople. In these situations, consumers should be aware that they may seek redress from the insurer.
An MGA should be able to enter into arrangements with multiple insurers with the explicit written consent of each insurer. The need for such consent arises from the fact an MGA’s liability for improper acts or omissions, whether systemic or relating directly to more than one insurer, could be apportioned amongst the insurers represented by the MGA on a “joint and several” basis. An insurer should be able to control which insurers “its MGA” is also representing as a matter of risk management.
In 1991, the Ontario Insurance Commission, under the Ministry of Financial Services at that time, received a report from the Insurance Legislation Review Project that recommended the regulation of MGAs, which were described as being in a position “to affect the financial stability” of insurers while remaining beyond the reach of regulators. There have been two decades of inaction since.
Time is a-wastin’ — insurance regulators should act swiftly to enact an appropriate approach to the regulation of MGAs to protect the public. IE
Richard Austin is counsel with Borden Ladner Gervais LLP in Toronto. Fadi Yachoua, student-at-law, provided assistance.