New regulatory requirements for managing general agencies in British Columbia could accelerate the trend toward consolidation among smaller MGAs, especially if other provinces introduce similar rules as expected.
“An increased regulatory environment is obviously going to put pressure on MGAs’ [profit] margins,” says Paul Brown, president of the Canadian Asso-ciation of Life Independent Brokerage Agencies, a Toronto-based organization that provides education to and advocates on behalf of MGAs. “And consolidation could be a fallout of that.”
Adds John Hamilton, president and CEO of Financial Horizons Group, a Kitchener, Ont.-based MGA: “Consolidation was already happening, with advisors pushing for more products on an MGA’s shelf. But now, with more regulation, it’s one more reason to leave the business.”
In January, the Insurance Council of British Columbia released a slew of new requirements for MGAs. From conducting background checks on life agents to verifying the suitability of transactions, MGAs — what the ICBC calls “middlemen” — will be on the hook for following these rules when doing business with insurers and life agents. The ICBC notice is the first time that a Canadian regulator has set rules for governing the conduct of MGAs.
Most larger MGAs deal with multiple insurers and have compliance systems already in place to meet the ICBC’s requirements, says Brown, but not all small players do — which may lead to consolidation within the sector: “Smaller MGAs may seek out larger MGAs, which already have the infrastructure in place to meet regulations.”
The ICBC’s new policy comes as the insurance sector waits for the Canadian Council of Insurance Regulators’ final word on the rules for the independent insurance channel in the followup to the CCIR’s review of MGAs released in February 2011. Some players in the sector expect the CCIR’s final recommendations for MGA regulation will closely mirror the ICBC’s requirements. It will then be up to the individual provincial regulators to adopt those recommendations.
“The CCIR will look very carefully and, I think, favourably at what B.C. has done,” says Lawrence Geller, president of Campbellville, Ont.-based L.I. Geller Insurance Agencies Ltd. “It’s the only regulator within Canada to deal with MGA regulation so far. And I think it’s done a good job so far.”
Among the requirements set out in the ICBC’s notice that could be difficult for a small MGA to handle is the “know your agent” requirement. It states that MGAs will have to ensure that life agents are “qualified, competent and knowledgeable”; background checks will be a part of that.
The ICBC rules suggest that a thorough background check includes: verifying an agent is licensed; obtaining references from previous MGAs that an agent has worked with; checking credit records and criminal records.
Obtaining that information could be troublesome for a small MGA, as it requires time and resources, says Ian Robinson, president and CEO of Hamilton, Ont.-based Greengrass & Frank Compliance Ltd., a background-check company that most large insurers and MGAs use. “Many of these guys try to backcheck [by] themselves, but don’t have the time or the accounts with the various credit bureaus to obtain all of those records on every person.”
To hire a third-party, background-checking company such as Greengrass to perform the background checks, Robinson says, would cost an MGA slightly less than $150 per life agent.
Regardless of how burdensome background checks are, it’s necessary for an MGA to determine that its agents are submitting suitable business, says Gerry Matier, executive director of the ICBC: “MGAs have a responsibility to know and oversee the agents they are transacting with. And, with our notice, we have made that clear.”
MGAs also will be required to report to a regulator any issues with or unethical behaviour by agents. Similar to background checks, unethical behaviour sometimes has been overlooked by MGAs, says Byren Innes, senior vice president and director with Toronto-based insurance consultancy NewLink Group Inc. “Now, with a formal requirement, the ICBC has made the implicit rule explicit. And MGAs are left with no excuse not to [follow it].”
In addition, the ICBC also now requires MGAs to scrutinize various aspects of the business transactions. When processing a transaction, the ICBC wants the MGA to examine the insurance policy sold relative to the life agent’s “expertise” and past work experience. Do these match? Is the policy out of the ordinary, in terms of amount?
For example, has the agent, who typically submits $100,000 critical-illness policies, suddenly submitted $2 million in whole life insurance?
“We want to make sure,” says Matier, “that MGAs are ensuring the right agents are selling the right products to the right clients.”
As the ICBC release notes: “In a limited way, MGAs are responsible for business processed on behalf of an insurer and may be held accountable if an insurance transaction is found not to be in a client’s best interest.”
CAILBA, in its efforts to prepare its members for more regulation in the pipeline, had released its Compliance Toolbox last autumn. That package includes standard templates and forms for brokers and insurer agreements, as well as for processes such as complaint-handling.
“Regardless of an MGA’s size,” Brown says, “it can use the Com-pliance Toolbox and prepare itself for the future regulatory environment.”
However, there is little doubt that even with prepackaged compliance tools, regulatory expenses will be difficult to contain. When factoring in the costs of using computerized systems and an electronic back office to keep track of the various aspects of transactions, as is required by the ICBC, compliance gets expensive, says Hamilton: “The smaller MGAs still have paper files for this reason.” IE