On February 9, the Agencies Regulation Committee of the Canadian Council of Insurance Regulators (CCIR), the umbrella group of Canadian insurance regulators, released a long-awaited issues paper on life insurance MGAs, entitled Managing General Agencies Life Insurance Distribution Model. The paper was published in response to the shift in the Canadian life insurance industry in recent years from the traditional "career agency" model toward the Managing General Agency (MGA) and Associated General Agency (AGA) distribution model. According to the CCIR, the paper is intended to "stimulate debate regarding the potential issues identified" in light of these changes and to launch a consultation process with stakeholders. The paper is open for comment until April 8, 2011.
An MGA is defined in the paper as "an individual, partnership or corporation that holds at least one direct brokerage contract with a life insurance company registered to do business in Canada." An AGA, meanwhile, consists of an arrangement "where groups of representatives contract together with an MGA, or have banded together to form a small MGA" and the paper includes AGAs within the definition of MGA.
Essentially, an MGA acts as a middleman and "facilitates business between representatives, their clients, and insurers" by providing services such as: (i) supporting representatives in obtaining contracts with insurers; (ii) processing business submitted by representatives; (iii) facilitating the flow of information between insurers and representatives; (iv) facilitating the submission of completed contracting requirements between representatives and insurers; and (v) training representatives.
While the career agency model was based on direct and exclusive relationships between insurers and representatives, in the MGA model, by comparison, most representatives are independent and deal with more than one MGA. This distinction gave rise to a number of the CCIR's concerns regarding the MGA distribution model. Specifically, the paper considers, and requests input from stakeholders on, the following issues, each of which is discussed in greater detail below: (i) the functions outsourced to MGAs; (ii) the supervision of representatives; (iii) the management of conflicts of interest; (iv) the role of MGAs in sales transactions and the handling of consumer complaints; (v) compliance with privacy legislation; and (vi) the supervision of MGAs.
- Functions Outsourced to MGAs
According to the CCIR, there is "considerable variability" in the scope and nature of functions delegated to MGAs by individual insurance companies. For example, the paper notes that compliance functions appear to be delegated more often within the context of agreements with large "National Accounts", while recruiting and administrative functions are delegated more often within the context of agreements with small MGAs. With no standardized approach to delegation or compliance monitoring, the CCIR is concerned that "the absence of a clear and consistent approach to how the [distribution] channel operates may have the potential to create issues in the marketplace and put consumers at risk." As such, the paper specifically asks, among other things, whether there are functions that should not be outsourced to MGAs and whether standardized compliance monitoring guidelines would assist smaller insurers.
- Supervision of Representatives
Traditionally, the role of supervision has been exercised by insurers that employ individual representatives and that have a legal responsibility to supervise and report misconduct. The CCIR is concerned that under an MGA distribution structure, it may be more difficult for insurers to monitor representatives, who at any given time may be associated with multiple insurers and MGAs. Specifically, "[t]here is a potential for a representative to spread questionable business among his/her various MGAs and insurers to avoid notice." The paper also notes that there are varying levels of delegation from one MGA agreement to the next with respect to screening. As such, the paper expresses concern regarding "who is responsible to investigate and report misconduct to the regulators" and specifically requests feedback from stakeholders regarding, among other things, whether MGAs should be responsible for reporting questionable acts by representatives to insurers or regulators.
- Managing Conflicts of Interest
The CCIR's principles for managing conflicts of interest state that: (i) an intermediary must place the interests of policyholders and prospective purchasers of insurance ahead of his or her own interests; (ii) consumers must receive disclosure of any actual or potential conflict of interest that is associated with a transaction or recommendation; and (iii) the recommended product must be suitable for the needs of the consumer. While most of the MGA contracts reviewed by the CCIR generally incorporated these principles, the paper expresses concern with the apparent lack of requirements respecting disclosure from the MGA to consumers and the fact that product suitability remains the responsibility of the representative. Further, insurers are still responsible for ensuring that accurate and complete information is provided to clients. The paper also notes a lack of clarity with respect to the extent to which insurers expect MGAs to ensure that representatives are complying with, and documenting, any needs analysis. The paper thus specifically invites feedback on the extent to which MGAs influence the decisions of representatives to place insurance with one insurer over another, what kind of disclosure is provided to consumers by representatives and insurers and the expectations of insurers respecting oversight when supervision of sales practices is delegated to MGAs.
- Role of MGAs in Sales Transactions and Handling of Consumer Complaints
With respect to complaint handling, the paper notes that since there is no direct relationship between consumers and MGAs, "neither MGAs nor insurers or representatives view MGAs as having responsibility to the consumer." In the paper, the CCIR expresses its uncertainty respecting what is actually delegated in terms of complaint handling and states that it desires clarity respecting the role played by MGAs. As such, the paper requests feedback with respect to the problems that have arisen regarding transaction errors involving MGAs, who would be accountable for errors in consumer transactions processed through MGAs, and whether there would be an obligation in the agreement between an MGA and a representative for the representative to report to the MGA any complaints received.
- Compliance with Privacy Legislation
The paper notes that an insurance applicant's personal information, gathered by a representative, would flow through the MGA and to the insurer. The CCIR is thus requiring confirmation that MGAs are handling personal information with the consumer's knowledge and consent.
- Who is watching over MGAs?
The paper further suggests that MGAs may not be supervised adequately by insurers. Specifically, while most MGAs are licensed as life insurance agents, there is currently no specific licensing category for MGAs "addressing the specific role that this new middleman performs in the marketplace." The functions typically performed by MGAs include back office support, sales and marketing support and market conduct compliance support. According to the paper, "there are no accepted minimum standards to perform these functions". As such, feedback was requested on whether the lack of specific rules affects the level of service provided by MGAs and whether insurers currently report MGA misconduct to regulators.
The CCIR is accepting submissions on the paper until April 8, 2011. According to the paper, stakeholder input will assist CCIR in determining whether the changes in the distribution of life insurance in Canada have created regulatory gaps in Canada that require policy attention.