Greater compliance burdens for MGAs?

The report is one of several issued by CCIR over the past few years that deal with rising public concerns that MGAs are an underregulated presence in the insurance sector and that the rules covering their relationships with insurers and agents need to be updated and clarified – with consumers firmly in mind. As the report puts it: “An insurer remains responsible to the policyholder for its products … [and is] accountable to regulators for [its] relationships with MGAs.”

Doug McLean, deputy superintendent of British Columbia’s Financial Institutions Commission and head of the CCIR’s agencies regulation committee, which had conducted the review of MGAs, says the CCIR’s position already has been accepted by the insurance sector: “Insurers are now clear that they are accountable to regulators for how their products get distributed and the reputational distribution risk that goes along with it.”

What remains a matter of debate is the best way to ensure this level of accountability in the insurers’ agreements with MGAs.

For example, the CCIR report concluded that the contracts between insurers and their MGAs often have been developed without adequate regulatory oversight and frequently are too vague and generic. This, the report says, leaves MGAs uncertain of what insurers expect of them.

The CCIR report outlines two key steps that insurers should take to clarify their relationships with MGAs. First, they should develop “effective systems and controls whenever they use the services of an MGA.” Second, insurers should incorporate the principles of Canadian Life and Health Insurance Association Inc.’s (CLHIA) Guideline G8: Screening for Suitability and Reporting Unsuitable Agents into all business dealings – “including any contracts involving the outsourcing of these functions to MGAs.”

To develop effective systems and controls for MGAs, the recent CCIR paper specifies several core principals for insurers to follow. These include: doing due diligence before entering into agreements with MGAs; clearly defining “the conditions, scope and limits of contracted services” of particular contracts with their MGAs; and developing a plan for “active oversight” to ensure MGAs are complying with the conditions of their contracts with insurers.

Although the insurance sector generally supports more oversight of MGAs, there is concern that more rules will lead to cumbersome procedures that add little in the way of the protections for clients that regulators are seeking.

For example, an MGA that deals with 12 insurers could find itself facing 12 separate audits in a relatively short period of time, such as two years, says Paul Brown, chairman and CEO of IDC Worldsource Insurance Network Inc., and president of the Canadian Association of Independent Life Brokerage Agencies (CAILBA), a Toronto-based organization that advocates on behalf of MGAs. “Without a standard approach for auditing MGAs,” Brown says, “there is a concern that MGAs may have to walk through many similar, but different compliance procedures with all of the insurers they service. It’s inefficient.”

The CLHIA and CAILBA have been working to standardize compliance reviews for MGAs. But the changes are still at the early stage, in terms of adoption by the insurance sector.

Last year, the CLHIA had provided its members with a standardized MGA compliance review survey tool, a standardized questionnaire that all of its insurer members use when questioning MGAs on various transactions.

CAILBA also has launched its own Compliance Toolbox software last year, which provides generic document templates and protocols for complying with privacy requirements, rep agreements and agent screening.

“Every insurer is going to want to ensure that an MGA is meeting its own requirements for specific products,” says Peter Wouters, director, tax and estate planning and retail insurance products and marketing, with Kingston, Ont.-based Empire Life Insurance Co., “regardless of the standardized surveys out there.”

As a result of the recent CCIR report, some MGAs may have to create systems for screening agents on a regular basis. Previously, it was thought that only insurers had to screen agents. If the CCIR’s recommendations are adopted, MGAs will have to screen agents for everything from work experience to criminal records under the CLHIA’s Guideline G8.

Many organizations find this type of screening costly and cumbersome. As a result, it’s now standard practice for MGAs to hire a third party to perform background checks on their behalf. These checks can run up to $100 per screening.IE

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