The Agencies Regulation Committee (“ARC”) of the Canadian Council of Insurance Regulators (“CCIR”) recently released an issues paper entitled “Managing General Agencies Life Insurance Distribution Model” (the “Paper”) and an invitation for stakeholder comment on the issues raised in the Paper.
This e-lert summarizes the Paper.
The ARC’s purpose in drafting the Paper, which was developed with the assistance of the Canadian Life and Health Insurance Association, the Canadian Association of Independent Life Brokerage Agencies, Advocis, and the Independent Financial Brokers of Canada, was to stimulate debate about the issues noted in the paper. Specifically, CCIR is interested in:
- identifying regulatory gaps that may be affecting life insurance consumers resulting from the shift from the traditional Career Agency distribution model to the Managing General Agency (“MGA”) distribution model;
- stimulating debate about these issues;
- launching a consultation process with input from life insurance stakeholders on these issues; and
- educating and building a common understanding of the topic and issues for both regulators and other stakeholders.
The CCIR’s consultation process with life insurance stakeholders will conclude on April 8, 2011, after which time the ARC will present a final version of the Paper to the CCIR for consideration. If CCIR believes there are significant issues with the MGA distribution model, ARC would then develop a position paper that it would also publish for consultation.
We understand the CCIR is contemplating the launch later this year of a similar review process for the MGA distribution model in the context of property and casualty (“P&C”) insurance and that P&C stakeholders may anticipate a request for input from the CCIR in due course.
Though we expect that this review of the MGA distribution model will lead to a recommendation for additional regulation of MGAs, we believe MGAs play a useful role in the distribution of both life and P&C insurance and we do not expect that such regulation will fundamentally change how MGAs operate.
SHIFT FROM CAREER AGENCY TO MGA DISTRIBUTION MODEL
In the Paper, ARC reviews the shift in recent years from a Career Agency distribution model to the MGA distribution model. In the traditional Career Agency distribution model an insurer recruits and trains insurance representatives directly who then work for the life insurer exclusively, often for their entire careers. In a MGA distribution model, the MGA acts as a conduit by facilitating business between the insurance representative, their clients, and insurers. In the Paper, ARC includes Associated General Agencies, an arrangement where groups of representatives contract together with a MGA or have banded together to form a small MGA, in the definition of MGA. Since the late 1990s there has been a major shift towards the MGA distribution model, with this channel recently emerging as the largest source of new individual life business for the life industry in terms of volume.
Under the MGA distribution model, a MGA may provide many of the following services, some of which have been traditionally provided by life insurers:
- supporting and assisting representatives in obtaining contracts with insurers;
- processing and tracking representative business;
- providing direct sales support to representatives;
- facilitating the flow of information between insurers and representatives;
- pooling commission payments for representatives from various insurers;
- facilitating the submission of completed contract requirements between a representative and an insurer;
- training representatives;
- providing market conduct compliance support to insurers; and
- in some cases, assisting in developing products and/or the adjusting of claims on behalf on an insurer.
REGULATORY CONCERNS WITH THE MGA DISTRIBUTION MODEL
According to the ARC, the shift to a MGA distribution model and the increased independence of representatives (many of whom often deal with more than one insurer either directly or through more than one MGA) may have created gaps in legislative oversight and compliance, potentially putting consumers at risk. Accordingly, the regulatory framework may need to change to address any such gaps that have arisen as a result of the shift to the MGA distribution model.
Given these potential gaps, the CCIR hopes to obtain more information from stakeholders in the consultation process regarding the following specific concerns:
- Functions Outsourced to MGAs
In the Paper, ARC notes that individual life insurers are delegating differing types of functions to MGAs, including representative compliance, representative training, complaints-handling, and oversight of representatives’ sales practices. There appears to be no standardized approach regarding: (i) what functions and responsibilities are delegated to MGAs, or (ii) the quality of compliance monitoring by insurers of functions delegated to MGAs. The absence of a clear and consistent approach may create issues in the marketplace and put consumers at risk. In addition, because insurers are ultimately responsible for their products, insurers may put themselves at risk where they cannot be certain that delegated functions are handled properly by MGAs.
- Representative Supervision
In some jurisdictions insurers are responsible for supervising and reporting to the regulator the misconduct (including lack of competence) of representatives acting on their behalf. ARC notes that in the absence of a direct one-to-one relationship between a representative and one insurer, the potential for representative supervision to be hindered under the MGA distribution model exists because it may be unclear who is primarily responsible for reporting misconduct to the regulator. In addition, ARC expresses concern over the varying levels of delegation by insurers to MGAs regarding the screening function of representatives, especially in regards to misconduct. With this in mind, the CCIR is concerned that the expectations of each party (insurer, MGA, and representative) may not be clear in the MGA distribution model.
- Managing Conflicts of Interest Principles
As MGAs may generally have little, if any, direct contact with the public, the ARC suggests that there may be a lack of disclosure requirements from MGAs to consumers, which may affect adherence to the Principles to Manage Conflicts of Interest (“Principles”) endorsed by the CCIR. The Principles are: (i) placing the client’s interest ahead of the representative’s interest, (ii) actual or potential conflicts of interest associated with an insurance transaction or recommendation must be disclosed to the client, and (iii) the recommended product must be suitable for the consumer’s needs. The Paper notes that a representative dealing directly with a customer remains responsible for product suitability and the insurer remains responsible for ensuring that the information provided to the client on a particular product is accurate and complete. In light of this and the Principles, the CCIR is seeking information regarding the practice of MGAs receiving a trailer commission from insurers based on volume of business generated through the representatives, with some of the MGA contracts requiring a minimum volume of production. The CCIR is also interested in information regarding the extent to which insurers expect MGAs to ensure that representatives are complying with, and documenting, any consumer’s needs analysis.
- Role of MGAs in Handling Consumer Complaints and Sales Transactions
In the Paper, ARC suggests that because there is no direct relationship with the consumer, MGAs may lack responsibility to the consumer. ARC also notes that MGA contracts sometimes delegate complaints-handling to MGAs or establish that MGAs are to assist insurers in complaint investigations. Given this, the CCIR would like to clarify what insurers are delegating to MGAs with respect to complaints-handling and whether the delegation is related to the product sold or otherwise. The CCIR would also like clarity about the role MGAs play in facilitating consumers’ rights to pursue a complaint through a third party dispute resolution mechanism.
The ARC also raises concerns over the possibility of errors in the insurance transaction that are attributable to a MGA’s functional role in the distribution chain between the insurer and the representative. The CCIR would like to ensure that, where errors occur, there is certainty about who should take responsibility and that consumers know where to direct their complaints.
- Compliance with Privacy Legislation
Because consumers’ personal information flows through MGAs on its way to insurers, the CCIR is concerned with the protection of that information. In addition, the CCIR wonders whether MGAs are retaining a client’s records directly or on behalf insurers and, if the latter, whether MGAs are obtaining appropriate consumer consent in compliance with privacy legislation.
- MGA Oversight
The CCIR would like to better understand who is overseeing the conduct of MGAs and to whom MGAs are accountable. The CCIR is concerned that there may be inconsistencies in how MGAs operate and about the lack of clear lines of accountability, as there is no accepted minimum standards regarding typical MGA functions.
MAKING A WRITTEN SUBMISSION
Written submissions should be made by March 31, 2011. The CCIR would prefer stakeholders send submissions electronically by email to:
However, written submissions may be forwarded to:
5160 Yonge Street, Box 85
Toronto, Ontario M2N 6L9
The CCIR intends to make public the submissions it receives. However, if stakeholders indicate they would like their submissions, or any part of their submissions, to remain confidential, the CCIR will respect this to the extent permitted by law.