Insurance regulators have started down a path that’s widely expected to lead to a new regulatory regime for life and health insurance advisors.

In a just published paper, the Canadian Council of Insurance Regulators poses 26 questions to the insurance industry in an effort to “stimulate debate” about the patchwork of oversight duties that fall upon regulators, insurers and the insurer’s main distribution channel — managing general agencies, the focus of the document. The chief purpose of the paper is to examine whether clients are looked after appropriately when they buy products from independent advisors who run their business through MGAs.

“I do think there will be some regulations coming out of this document,” says Byren Innes, senior vice president and director of NewLink Group Inc. in Toronto.

The CCIR is a national body representing provincial and territorial insurance regulators.

According to the CCIR paper: “One of the key points captured in this issues paper is that there is an apparent lack of clarity as it relates to the roles, responsibilities, accountabilities and appropriate oversight of the insurance agent, the MGA and the insurer.”

The comment period for the paper ends April 6.

Roughly put, MGAs are to the insurance industry what dealer firms are to the mutual fund and securities world.

MGAs distribute commissions, perform administration, back-office and a handful of other functions for insurance companies, depending on the contracts they maintain with those companies.

But unlike many mutual fund dealers, MGAs are relatively unknown and are unlicensed as a business category by provincial insurance regulators.

What’s more, MGAs’ numbers have swollen to many hundreds across Canada without much oversight from regulators or from the industry. That’s what gave rise to the CCIR review paper.

Once the questions raised are answered, the paper notes, regulators will be in a better position to determine “if the regulatory framework must change so that the goals of fair treatment of consumer and compliance with laws can be met.”

The CCIR paper poses a wide range of questions around the responsibility to deal with consumer complaints and compliance with federal privacy legislation. But the central questions focus on product suitability and client needs analysis.

MGA INFLUENCE

The paper points to a “usually vague” function sometimes delegated by life insurance companies to MGAs in contracts to make certain that advisors are selling clients the right products for the right needs: “Whereas it is understood that the obligation is on the representative to ensure that the product recommendation is suitable to the client, it is unclear to what extent MGAs are expected by insurers to ensure that the representatives are complying with, and documenting, any needs analysis.”

The CCIR paper follows up with three questions for stakeholders:

> How might an MGA influence advisors to recommend certain products over others?

> What compensation disclosure documents does an advisor give clients, and who supplies the documents?

> What supervision of the sales practice do insurers expect from MGAs?

The paper devotes some discussion to describe the disintegration of the so-called “career agency model” for insurance distribution, which gave rise to MGAs.

Historically, insurance agents sold products for one insurer — an employer — so oversight was a matter of the insurer’s internal human resources.

But with independent agents now selling many products from several insurers, that responsibility is now unclear. There is concern within the industry and in legal circles that there are gaps in agent supervision.

Says Harold Geller, a lawyer with Doucet McBride LLP in Ottawa: “[Client needs analysis] is a major problem we see in lawsuits in which the needs identified in the agent’s reports in no way reflect the needs identified between the agent and the client.@page_break@“And I can tell you,” he adds, “on examinations of major insurers in Canada, [that] when they have been required to produce compliance processes for supervision of agents, they have been unable to. And at times, their witnesses have said there is no such thing.”

Innes notes that although these needs analysis and compliance functions are supposed to be carried out by the agent during a sale according to various guidelines and codes of conduct, no entity takes responsibility for them being completed as a matter of course, and then no one checks to ensure that they have, in fact, been done.

“The first step is make sure there’s a check that it’s being done,” says Innes. “And the second step needs to be ‘Are we sure it’s being done?’ Maybe that’s an audit from time to time, or random case-pulling.”

For most larger MGAs, Innes adds, a process such as this wouldn’t make a substantial change to its practice.

However, whether MGAs or insurers end up taking on some supervisory roles is a matter of debate.

Gerry Matier, executive director of the Insurance Council of British Columbia, who helped to draft the CCIR paper, says that many in the insurance industry hope the insurers themselves “at the end of the day… will provide an extra set of eyes that will help protect the consumer in the long run. The problem is that there’s never been any accountability from a regulatory standpoint on the insurer in that area.

“When I first came here under the career agency model,” Matier continues, “it was certainly talked about and expected. But, you know, when it came down to the rubber hitting the road, the company shrugged and said, ‘Look, we’re not responsible’.”

KITCHEN TABLE

Peter Lamarche, president of theCanadian Association of Independent Life Brokerage Agencies, a Toronto-based industry group representing about 50 large MGAs, has said that MGAs aren’t in a position to supervise agents “at the kitchen table” with regard to suitability and disclosure.

Lamarche is not prepared to guess what sort of regulation regime might come out of the CCIR paper — if any — but he’s pleased that the document begins to “build structure” around the oversight of the sales process. In the end, he believes, various parties will have overlapping duties.

In addition to questions about the sales process, the CCIR paper includes queries centred on a number of other themes:

> Consumer complaints: regulators want to know if MGAs handle complaints now, if MGAs should handle complaints and, if so, to what entity should MGAs report those complaints?

> Client privacy: do MGAs comply with privacy legislation?

> The supervision of agent licensing, including training and the maintenance of errors and omissions insurance.

> The lack of licensing for MGAs.

Reaction to the CCIR paper’s major questions by the insurance firms is muted so far. However, appended to the paper is a submission from the Canadian Life and Health Insurance Association Inc., the industry’s Toronto-based lobby arm; that appendix notes that the responsibility for product suitability and meeting client needs lies between the advisor and the insurance company.

The CLHIA says it will be responding to the questions set out in the CCIR paper during the comment period.

“While MGAs can play a significant back-office role in insurance distribution,” Wendy Hope, the CLHIA’s vice president of external relations, “it should be noted that consumers work with licensed life agents when they purchase their policies. And those policies are held directly with an insurer that, of course, stands squarely behind its products.” IE