Managing general agencies (MGAs) and independent insurance brokers are poised to face more oversight and accountability as the Canadian Council of Insurance Regulators (CCIR) implements recommendations designed to strengthen the MGA distribution channel. The result, insurance-sector associations say, will be a greater compliance bur-den for MGAs and, most likely, more consolidation in the independent distribution channel.
The CCIR announced in early November that it is adopting a finalized version of the position paper drafted by its agencies regulation committee (ARC), the group dedicated to examining the independent channel. The paper, which was released for consultation in May, clarifies the roles and responsibilities of MGAs in the distribution of individual life insurance products, with four recommendations that aim to harmonize best practices and ensure MGAs are subject to the appropriate controls and oversight.
“It brings some clarity to the role of the MGA in the distribution of life insurance,” says Paul Brown, chairman and CEO of IDC Worldsource Insurance Network Inc. in Vancouver and president of the Toronto-based Canadian Association of Independent Life Brokerage Agencies (CAILBA). “[CCIR] identified the gaps in the system and put out a pretty strong suggestion on how those gaps can be filled.”
The recommendations deal with MGA/insurer relationships, agent supervision, product suitability and the information needs of regulators. The ARC received submissions from 23 stakeholders during the consultation period, revealing primarily positive feedback. Some submissions urged the committee to consider additional factors in its ongoing work. But the general support from the insurance sector prompted the CCIR to adopt the recommendations without amendment.
Having adopted the paper, the CCIR now expects the insurance sector to implement the recommended best practices. At the regulatory level, it will be up to the policy-makers in each province to determine what measures, if any, they wish to implement regarding the best practices.
“[The CCIR is] strongly recommending that the principles in the paper be adopted,” says Brown. “Within the industy, the feeling is that the recommendations are seen to be fair and equitable.”
Advocis, CAILBA and the Cana-dian Life and Health Insurance Association Inc., all of which are based in Toronto, as well as the Mississauga, Ont.-based Independent Financial Brokers of Canada (IFB), have expressed support for the CCIR proposals.
“The relationship between insurers and MGAs is going to be more structured, and that helps the entire industry,” says Greg Pollock, president and CEO of Advocis. “We’ll end up with a more consistent oversight and compliance regime across the country.”
The aspect of the CCIR regulations that is likely to have the greatest implications is the acknowledgement that insurers — not MGAs — are responsible for supervising the conduct of agents who sell their products.
“It reinforces that the insurance company is ultimately responsible for the actions of those it contracts with,” says Susan Allemang, head of regulatory and policy affairs with the IFB.
This sends an important message to insurers that even when they outsource certain responsibilities to MGAs, they’re still on the hook for ensuring those responsibilities are met. As a result, MGAs will face more comprehensive compliance obligations and insurers will be expected to audit the MGAs periodically to ensure they’re meeting these obligations and documenting them properly.
“Probably the biggest challenge for the MGA community,” says Brown, “is making sure that [it’s] able to respond to that by having the processes in place to be able to meet that challenge.”
The impact of the recommendations on individual MGAs will depend on the extent of the compliance regime that they already have in place. John Hamilton, president and CEO of Financial Horizons Group, a large MGA based in Kitchener, Ont., says he doesn’t expect the recommendations to have a meaningful impact on his firm or other large MGAs, as most already have robust processes in place.
“For those of us that have it in place,” Hamilton says, “it’s what we’re doing already.”
Smaller MGAs, however, are likely to have some catching up to do, says Brown: “They’ll have to make sure that they have people and the infrastructure in place. It’s going to be a challenge.”
Advisors in the MGA channel are also likely to face stricter compliance responsibilities as the MGAs more closely monitor the extent to which advisors are meeting their licensing, suitability and record-keeping obligations.
“Their actions will be subject to scrutiny,” says Brown. “They’ll be held to a higher standard, for sure.”
As the CCIR recommendations take effect, they’re expected to drive more consolidation among MGAs. Smaller MGAs, facing a slew of new compliance costs and responsibilities, could be squeezed out of the market by larger players that already have the infrastructure in place. And, as insurers adapt to their new auditing requirements, they may limit the number of MGAs they deal with.
“Because of that oversight responsibility, I would think that insurers can only deal with so many MGAs in order to do that effectively,” says Pollock. “It will mean, at the end of the day, fewer MGAs in the country.” IE