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An update on regulators’ study of managing general agencies

By Donna Glasgow | May 26 2011 05:02PM

Canadian insurance regulators are presently studying the regulation of managing general agencies. Conducting this study is the Agency Regulation Committee (ARC) formed in late 2008. Doug McLean, is Chair of the ARC and Executive Director of the Insurance Department at the British Columbia Financial Institutions Commission. He agreed to answer questions on the committee's work and progress in an interview with The Insurance and Investment Journal.

Q: Where are you at with the MGA study?

A: "We've been working on the report. We've been very busy meeting with industry and stakeholder representatives. We're learning a lot about MGAs and how they operate."

Q: Any observations that you can share at this point?

A: "As one of the steps in our research, we surveyed insurance company regulators and insurance sales regulators -t CCIR and CISRO members. From those surveys, three areas of concern have emerged.

First, although licensing is required for MGAs in most jurisdictions (due to the restriction on who insurers may pay commissions to), this licensing is the same as the ‘Mom & Pop' insurance agent licence. It is not specific for MGAs.

As there is no special licensing for MGAs, there may be a gap in qualifications needed to carry on MGA activities and continuing education requirements.

Currently, the licensing requirements are focused on the responsibilities of front line advisors or salespersons.

The second observation is that there have been situations in the past where enforcement actions were required where there did not seem to be appropriate controls by insurers over MGAs. Also, there have been some problems for consumers to identify their insurer when a product is branded by an MGA.

Finally, there have also been some unlicensed activities involving MGAs. One example is an MGA who set up a travel insurance claims processing operation. But, it did not have a licence as a claims adjuster.

These are some of the observations made by regulators, but we haven't come to any conclusions.

In British Columbia, the biggest concern is there does seem to be some gaps in insurers' controls over MGAs. In the life sector, thirty years ago there was no independent distribution; it was done by a captive sales force.

What has evolved is a distribution system that is more independent, with MGAs representing eight or nine different insurers. Insurers have really outsourced some of their functions to independent entities.

OSFI (Office of the Superintendent of Financial Institutions) and Quebec have good guidelines concerning outsourcing. Our question is, are those guidelines being applied to insurers' outsourcing arrangements to MGAs?

There is another area of concern. There is also a feeling that the current level of E&O (errors and omissions) insurance should be higher for MGAs. E&O coverage for an advisor may not be enough to cover an MGA."

Q: Some MGAs are concerned that your study might lead to regulation that requires them to be responsible for supervising independent advisors activities perhaps like the mutual fund dealer model.

A: "Currently, the mutual fund dealer model is not being considered by insurance regulators. We have not yet seen any issues that warrant that level of regulation.

However, there is reputational risk throughout the whole distribution channel. Insurance companies and MGAs have reputational risk, which needs to be managed.

Insurance companies and many MGAs do advisor screening. There are a lot of advisors out there and it would do well for maintaining public confidence in the industry that everyone takes some responsibility for ensuring that the bad apples stay out of the business."

Q: What are the overall goals of this study or project?

A: "The Agencies Regulation Committee was established to conduct research into the regulation of managing general agencies, wholesale agencies and third party administrators to determine whether their activities pose a risk to consumers and do any regulatory gaps exist."

Q: Do you anticipate that there will be major changes in the way that MGAs are regulated after this initiative is complete?

A: "We have not yet come to any conclusions, however, I believe this work has resulted in a healthy debate on the way MGAs are regulated."

Q: When is the report expected to be released?

A: "Late this summer or early this fall. It will be a discussion paper not a position paper. Industry stakeholders will then be able to comment on the discussion paper."

Q: What would be the next steps after that?

A: "The next step after releasing the discussion paper is to listen to the feedback from the industry and stakeholders."

Q: When do you think the whole process would be complete?

A: As insurance markets continue to evolve, we expect that ongoing reviews of changes in distribution channels for regulatory gaps will be necessary. However, this project will be completed by winter 2010. Each provincial regulator will need to assess the results and then adopt the regulatory regime and approach that meets its province's desired regulatory outcomes.

Q: Should MGAs prepare themselves for any major regulatory changes?

A: It is too early in this process to know what regulatory changes may occur, if any.

Q: Anything that you would like to add?

A: "There's been quite a bit of interest in this project. Normally, after the CCIR puts out a discussion a paper, we receive submissions. In this project, we have already received unsolicited feedback. There is a clearly a desire to make these distribution channels stronger.

The discussion paper will be posted on the CCIR website, www.ccir-ccrra.org. We invite all interested stakeholders to provide their views on the issues raised in the paper."

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