The managing general agency distribution channel presents “reputation risk” for the insurance industry, and a national group of insurance regulators suggests the industry either needs to manage MGAs better or MGAs need to be overseen more closely.

The Canadian Council of Insurance Regulators, an umbrella group of provincial and territorial bodies, started reviewing the activities of MGAs, the fast-growing distribution channel through which financial advisors run their insurance business, late in 2009.

The CCIR has now completed several preliminary meetings and plans to release a consultation paper later this year to address several concerns about the MGA network.

“We have seen that there is reputation risk throughout the whole distribution channel,” says Doug McLean, executive director of insurance for the Financial Institutions Commission in British Columbia, one of the member regulators in the CCIR, “that involves both insurance companies and the MGAs, which may need to be well managed — either by the industry or through licensing and regulation.”

The CCIR is aiming to distribute its consultation paper either in late summer or in the autumn. The paper will contain a few key points for consideration, says McLean, who addressed the Canadian Association of Independent Life Brokerage Agencies in late April to gather some feedback.

McLean, who is leading the CCIR’s so-called “agency review committee,” says that by no means is the consultation paper finalized, but it will address a few main concerns, including:

> Licensing and Qualification. No standard licensing regime for MGAs exists, although various industry figures put the number of agencies at potentially more than 400 — depending on how they’re defined.

Some licensing exists, but it’s not geared specifically toward larger organizations that call themselves MGAs, or to their functions.

“The current licensing requirements are focused more on front-line salespeople, not on the MGAs,” says McLean. “As there’s no special licensing required, there may be a gap in the qualifications required to carry out MGA activities.”

> Educational Requirements. “Because there’s no specific licensing regime,” says McLean, “it’s possible that education and continuing education requirements might be different.”

> Underfunded Errors And Omissions Insurance. For larger MGAs that do a lot of business, more insurance may be needed, says McLean. He says MGAs tend to have contracts with multiple manufacturers, and the potential for short-term capital requirements exists.

If one or more agents sells a handful of bad policies and they’re terminated by the client — usually the result of poor sales practices — commissions generally need to be refunded to the manufacturer by the MGA.

“So, there’s some liquidity issues there,” McLean says, “and there may be some need for higher errors and omissions insurance.”





@page_break@> Outsourcing Guidelines. The Office of the Superintendent of Financial Institutions oversees insurance companies and, by some definitions, the duty provided by MGAs to insurers may be defined by outsourcing guidelines that OSFI describes on its website for the companies it oversees.

McLean says that some enforcement shows there may be “significant reputation risk” in insurance companies’ contracts with MGAs as outsourced vendors.

He adds that there’s a question about whether some of the arrangements with MGAs are material enough to the life insurers’ operations to be considered true outsourcing arrangements.

In any case, says McLean, “Insurers in some business models take a hands-off approach. They don’t do due diligence on the MGA, or make sure the MGA is carrying through on its code of conduct or business practices.”

MGAs may not be describing products well enough or even identifying the product’s manufacturer.

“There’s some trouble for consumers even identifying the insurer,” McLean says, “so they’re not even able to get access to a complaints or ombudsman service.”

Several industry executives from full-service dealerships that own MGAs have expressed concern that some advisors tend to prefer to avoid the securities and mutual fund arms so that they can avoid some of the tougher compliance.

“We’ve seen some people give up their [mutual] fund licence and just sell segregated funds so they can avoid suitability guidelines,” says Mark Kent, president of Calgary-based Portfolio Strategies Corp. “That’s an easy way out, and it’s not in the clients’ best interests.”

The lack of know-your-client forms and suitability guidelines issue is not on the table at the moment, but it may be.

At the same time, almost no one wants another layer of rules-based regulation — and McLean insists, “The work the committee has done so far has not seen any issues that warrant that level of regulation.”

Byren Innes, an owner and senior vice president with Toronto-based NewLink Group Inc., a consultancy to the insurance industry, says the review is needed, but it will be a slow process with plenty of input from the industry.

The CCIR review is partly motivated by several enforcement actions in B.C. that have highlighted some lack of manufacturers’ oversight, adds McLean, either of MGAs or independent agents.

After at least one comment period, the CCIR will make recommendations to each of the provincial finance ministries about any oversight or regulation that may be needed. IE