Worrisome debt stalks some agents

Of the 19,000 advisor screens that Greengrass conducted  in the year ended Sept. 30, 10% were flagged for carrying alarmingly high levels of consumer and industry debt, vs only 5% for the corresponding period in 2008.

This increase is worrisome, says Ian Robinson, president and CEO of Greengrass. The fear is that the financial pressure on this group of advisors to meet their loan obligations could lead to bad business practices — such as generating commissions by selling clients unsuitable or expensive insurance products.

“No one drowning in debt should be selling insurance,” says Robinson. “While 90% of agents are honest and ethical, it’s this high-risk, [indebted] group that [can] give the rest of the industry a bad name.”

The increase in advisor indebtedness should serve as an “early red flag” to insurance companies and regulators alike, says J.P. Bernier, special advisor to the president, risk management, with the Toronto-based Canadian Life and Health Insurance Association Inc., the national organization that represents insurers.

“There needs to be special attention paid to the increase in advisor indebtedness,” says Bernier. “When the conflict of interest between an agent and client is very high, so is the risk of bad practices.”

The rise in indebtedness may reflect a decline in commissions-related income as hard-hit clients have cut back on their life and health insurance coverage.

“A client isn’t going to have some fancy insurance policy,” says Robinson, “when he or she has lost a job and is worried about putting bread on the table.”

Typically, Greengrass conducts a four-point background check that includes: references, criminal records, consumer debt credit rating and industry debts.  he consumer debt credit rating covers credit card debt, mortgages and other personal loans.

Advisors are deemed to be high-risk when their annual commissions are insufficient to sustain the consumer debt they are carrying. An overleveraged advisor may be tempted to sell clients coverage they don’t need or, worse, strike deals with clients to pay a portion of a client’s premiums for a few months, just to earn the commission on the sale.

“We look to see if an agent is ‘maxed out’ and is living beyond [his or her] means,” says Robinson. “Some agents owe hundreds of thousands in credit card debt, as well as have a mortgage — and that’s a big clue they are maxed out.”

“Industry debt” refers to the commissions an insurance advisor has been paid by an insurer on the sale of policies that lapse after a short time, usually because the clients do not keep up their premium payments. The commissions are paid on the assumption that the policies in question stay in force for a number of years; the advisor is required to return the commissions on lapsed policies to the insurer within a reasonable amount of time. An advisor may be motivated to use these commissions to service personal debt.

Red flags go up if the advisor fails to pay back the insurer. In this case, the advisor’s MGA will usually settle the advisor’s debt in order to preserve its own relationship with the insurer.

“Old debt that has rolled from the insurer to the MGA is troubling because, in most cases, the agent has likely fled the MGA,” says Robinson. “An MGA usually doesn’t work with an advisor if there is no plan to settle the debt in question.”

Although insurers use Green-grass to screen advisors on first-time transactions, they also will request that the company screen an advisor again whenever the advisor switches MGAs — or if there is a client complaint.

It’s during these rechecks that an experienced but overleveraged advisor may be flagged as being high-risk.

Greengrass conducts 9,000 initial full-scale background screens a year, as well as 10,000 rechecks a year for debt and persistency — the amount of insurance contracts sold by an advisor that remain in force.

The rechecks are necessary to monitor the ongoing financial health of an advisor, says Robinson: “Someone could look OK today. But who is to say that in six months, he or she won’t be on the verge of bankruptcy?”

Many large insurers — such as Waterloo, Ont.-based Sun Life Financial (Canada) Inc. and Manulife Financial Corp. and Kingston, Ont.-based Empire Life Insurance Co. — use Greengrass to do their screening. Larger MGAs, such as Woodbridge, Ont.-based Hub Financial Inc. also use Greengrass.

Meanwhile, smaller insurers and MGAs tend to conduct their screening process in-house.

From a regulatory standpoint, all insurers operating in Canada, regardless of jurisdiction, have a duty of care to manage the risk related to market conduct and the distribution of insurance.

Monitoring advisors falls under insurance distribution; however, the “how” — or the processes an insurer uses to monitor advisors selling its products — is open to interpretation by each insurer.

Meanwhile, advisors are required by the Canadian Council of Insurance Regulators to disclose to clients any potential conflicts of interest.

One type of conflict of interest could be created by the advi-sor’s high debt problem — with the advisor recommending higher-paying but inappropriate products to clients so that the advisor can use the resulting commissions to service his or her personal debt.

To provide clarity, the CLHIA has issued screening guidelines for its members, suggesting advisors be screened using various criteria, including persistency, indebtedness, bankruptcy and errors and omissions insurance.

“While [the guidelines] aren’t rules per se,” says Bernier, “it’s strongly recommended all members screen on these points.”

Given the flexibility that insurers have in their screening processes, not all are adhering to the guidelines, says Robinson: “Some companies don’t screen at all. And, as a result, bad agents are slipping through the cracks.”

Although some smaller insurers and MGAs had tried to save money by doing the checks in-house before the recession, an increasing number of small MGAs are now conducting more extensive screens through Greengrass, says Cristina Soldera, assistant vice president, distribution compensation, individual finance and planning, with Sun Life.

“While some MGAs used to rely on insurers to screen agents,” Soldera says, “many are doing their own screening now, since they can’t afford the risk of bad business.”

Although there is talk of regulators requiring MGAs to conduct background checks at a cost of less than $100 per head to screen their advisors, the decision is a no-brainer, says Robinson: “It’s a small price to pay up front to prevent working with a bad agent down the road.” IE