A defining issue: what is an MGA?

In its regulatory review of MGAs, the number one issue for the CCIR is to develop a clear definition of what constitutes a true managing general agency, says Rick Forchuk, vice-president, retail distribution at Empire Life. The questions raised by regulators in their issues paper on MGAs released for an industry consultation in February indicate that the CCIR’s perceptions of what an MGA is are different from what Empire Life believes they ought to be, Mr. Forchuk says.

“There’s a lot of distance between us. They talk about an MGA in cases being an individual with a specific type of contract. We don’t see it that way and I think most insurers don’t see it that way…I think there is a big disconnect between the real world and the market place and what many of the regulators perceive the MGA world to be about.”

He adds that most insurers would have some kind of definition of what is an MGA. “Ours is quite simply an entity that gets most of its income from the overrides on the production of people that it recruits, develops, supervises and retains, as opposed to individuals who have an MGA contract, or small groups of producers who have MGA contracts.”

Mr. Forchuk says there are a lot of these kinds of set ups around: “Three guys working out of a little corner office and some company gives them an MGA contract. They call themselves an MGA because they have MGA-sized compensation, but they’re not an MGA in terms of having a back office, a compliance area and all the things that go toward making a ‘real’ business. We don’t see those as real businesses in terms of MGAs.”

The CCIR needs to arrive at a “substantial and robust” definition of what an MGA is, Mr. Forchuk says. This definition should include such aspects as having a back office, a significant presence, a business model that depends on the development, supervision and recruitment of advisors and that its derives the bulk of its income from these activities, he says. A real MGA’s principals are not its main producers, he adds. “They may have a contract and they may have some clients, but the bulk of their business is the retention and recruiting of advisors.”

Why is it important for regulators to have this clear definition? If the CCIR is going to impose regulations, they have to know who they are regulating, he says. A small mom-and-pop MGA would not be in a position to provide the kind of services for advisors and the public as would a much broader organization, notes Mr. Forchuk. So, if at some point the CCIR regulates a list of MGA responsibilities, then “I think right off the bat it would knock out probably a third to half of all of the people calling themselves MGAs.” This would not necessarily be a bad thing, continues Mr. Forchuk, but it would certainly be something to be reckoned with. “Those people would have to very quickly figure out what their business model is.”

Insurers’ responsibilities

Another definition issue has also arisen around what constitutes outsourcing, says Mr. Forchuk. The CCIR raised the issue of insurers outsourcing tasks to MGAs in its issues paper. “We do not think that outsourcing by definition is what they’re suggesting it is. What do we outsource? Very, very little,” says Mr. Forchuk.

Requirements that insurers make of MGA such as screening advisors for suitability and operating on a compliant basis are not outsourcing, he affirms. Instead, Empire sees this as a sharing of some responsibility, which it supervises as a company. “I don’t think from Empire’s perspective, nor do I think from most companies, that we are worried by the level of supervision that’s required on our behalf because as the legislation presently exists, that’s where the buck stops anyway – with the insurer.”

At the end of the day, insurers are held responsible for the suitability of advisors – not necessarily for the advice given at point of sale, but certainly for the suitability of advisors, he adds. “It’s our responsibility to make certain that they’re screened, that appropriate financial and background checks are done.”

Other outsourcing questions raised by the CCIR involve claims payment and product development. Mr. Forchuk says he doesn’t know of any life insurer on the individual side who outsources these activities. He believes there may be some confusion among regulators between MGAs and third party administrators, perhaps in the group business. “We don’t outsource any claims paying…that’s also true of product development.”

With perhaps one exception, there are virtually no MGAs that would play a significant role in product development, although sometimes advisors do give input to insurers on what they think products should look like, he says. “We listen and in some cases say ‘Gee that’s a good idea’, but that’s not outsourcing at all. We don’t outsource product development. I don’t think we outsource anything.”

Because of some confusion over various issues, Mr. Forchuk thinks that the CCIR review of MGAs is an excellent communications vehicle that needs to lead the different industry stakeholders to common ground. “We think it is a very good thing that they’re asking these questions because it’s only through opening dialogue, on a basis involving all of the stakeholders, that we can arrive at some conclusions that are beneficial to the public at the end of the day.”