MGA system under fire
The Globe and Mail’s article, “Through Canada’s insurance loophole,” published Dec. 18 elicited strong reaction from the insurance distribution channel. The article opened by citing the case of a 96-year-old Vancouver woman who cashed in a $200,000 segregated fund and invested it in her insurance agent’s company, leaving the woman’s disabled 71-year-old son without the inheritance he’d counted on.
It went on to blame the growth of the MGA system for severing the chain of oversight between insurers and independent agents. The report claimed to have uncovered “a gaping hold in Canadian insurance regulation…nearly half of all individual life insurance policies in Canada are now being transacted through MGAs, which often undertake little – if any – oversight of agents in the market.”
“To equate the plight of a 71-year-old man hooked up to an oxygen tank with the emergence of MGAs is ridiculous,” said Paul Brown, CEO of Worldsource Insurance Network, a Vancouver-based MGA. “The issue was a financially desperate advisor acting outside of her insurance licensing.”
The report stated that the Canadian Council of Insurance Regulators, the umbrella group of provincial regulators, “became aware of the MGA issue at least two years ago and assigned a group of officials to look into it. However, the group has yet to report or take any action.”
Carol Shevlin, the CCIR’s Toronto-based policy manager, said the group has indeed been looking at MGAs, and has just released a paper titled Managing General Agents: Life Insurance Distribution Model (see page 3). But she added that the CCIR’s review of MGAs was not a response to any known problems, but rather the first in a series of reports the CCIR is planning. “We’re looking at the various things that have grown up in recent years between the insurance companies and policyholders, and whether there is anything to be concerned about. It’s all part of our risk-based approach to market conduct regulation.”
Accountability of MGAs is among the issues explored in the CCIR paper, she added. The paper’s release was eagerly awaited by the industry where accountability to consumers for the actions of rogue or negligent agents is a hot-button issue.
Peter Lamarche, president of the Canadian Association of Independent Life Brokerage Agencies (CAILBA) that represents MGAs, said there is ongoing discussion among insurers, MGAs and regulators about who is responsible for agent oversight. CAILBA’s position is that the agent is the person primarily responsible for product suitability. “The decision about which product the client will purchase is a decision reached between the agent and the client,” he said. “We, in turn, are responsible for knowing our agents. Just from a business risk point of view, we need to know who our agents are, and take care in the hiring process with screening and background checks.
“And if, for example, a new advisor sold 50 of the same type of product to members of the same community, generating commissions of more than $100,000, the onus would be on the MGA to investigate this advisor.”
Insurance companies also have a responsibility to the consumers who buy their products. When a consumer buys insurance, he buys it from the insurance company, not the agent, noted Allan Bulloch, president of Independent Planning Group Inc., an Ottawa-based MGA. He gave an example from his own practice of a client who was facing a deadline to convert an insurance policy.
“We were advised by the insurance company, we advised the agent, the agent discussed the matter with the client, who agreed to convert the policy,” he said. “But nothing happened and the deadline passed. The client professed that he had communicated his intentions to the agent and showed us his e-mails. The insurer reviewed the case and agreed that the right thing was to allow the client to do what he’d intended and convert the policy.”
“Insurance policies are held directly with the insurance company,” CLHIA’s Ms. Hope said, “and it will stand behind its policy. The insurance company is the party that is accountable to clients.”
In a letter to the editor of The Globe and Mail, Jim Rogers, founder and chairman emeritus of Vancouver-based Rogers Group Financial Ltd., said insurance companies should be held liable for the actions of both their MGAs and the agents who put their business through these MGAs.
“The companies should be held vicariously liable,” he added in an interview, “meaning they should be held liable by reason of their association with the MGA. If I’m going to be held vicariously liable, I’m going to have a pretty tight contract with my MGA in place.”
In a posting on his blog, RickardsRead.com, Alastair Rickard, a former life insurance company executive with Mutual Life, Clarica Life and Sun Life Financial, and founding editor of the Canadian Journal of Life Insurance, echoed this: “Life companies should not be allowed to shelter from accountability to clients for deficient actions by those who sell their products behind a wall [legal and/or regulatory] comprised of those who facilitate the sale of the company’s financial products…whether those salespersons are MGAs, individual agents placing business directly with a brokerage company or via an MGA or a company’s career agent.”
At present, that would be difficult to enforce. “Each province has its own regulator that is responsible for oversight of life agents, and each province has an insurance act and regulations that govern some training and supervision requirements,” Harold Geller, a lawyer with Doucet McBride LLP said. “But the extent of responsibilities on insurers as a result of the acts or regulations varies among provinces. Some provinces, like Newfoundland, have a reasonable level of supervision. Some provinces, like Ontario, have supervision wording that is outdated and has little, if any, practical application.
“Quebec is unique in Canada,” he added, “and has much higher standards for the advice and sale of financial products. These standards provide a much higher level of consumer protection and advisor professionalism.”
“MGAs in the main do not exercise the same level of interest/compliance supervision as do those life companies with their own career agents,” Mr. Rickard said in his blog.
But the career agency system is not immune to fraud either. “The outright defrauding of clients, relatively infrequent, can and has occurred involving licensed life insurance intermediaries in all parts of the active agency system, including the best managed and supervised career agency systems of the very best life insurance companies – as I know as a matter of first-hand knowledge,” Mr. Rickard added.
Mr. Brown said the Globe and Mail article failed to point out that MGAs have been instrumental in bringing better products and services to Canadian consumers through independent brokers.
“Years ago, when I first got into the business, I was a captive agent and sold the insurer’s products exclusively,” Mr. Bulloch said. “Today I can offer more choice and, thus, better represent my clients.”
The Dec. 18 article implied more regulation of MGAs and agents is needed. “The MGAs are trying to stave off regulation, worried that new rules will be bad for the bottom line,” it said.
CAILBA strongly disagrees with this statement, Mr. Lamarche said, “as evidenced by our actively participating with the CCIR and other provincial regulators.” And he disagrees with the implication “that regulators are powerless and have done little in the area of compliance,” citing the CCIR’s recent work on understanding the MGA distribution channel, with input from CAILBA.
More disclosure, not more regulation, is needed, said Randy Reynolds, president of Financial Advisors Brokerage Group Inc., a Vancouver-based MGA. “The higher the level of disclosure, the more confidence the consumer will have in the insurance system. I believe in disclosing compensation and any conflicts of interest to the client. Perks such as conferences and travel should be disclosed. And commissions need to be disclosed.”
Mr. Geller said the provinces have “a checkerboard approach” to disclosure. “Ontario has weak disclosure requirements…There are no meaningful requirements with respect to disclosure of conflicts of interest, compensation, limited shelves [that an agent can only get or chooses to offer contracts from a limited number of insurers] or the impact of these issues on the agent’s representations, competitiveness and objectivity.”
CLHIA members, making up 99% of Canadian insurers, require agents to disclose method of compensation, the companies they represent and conflicts of interest to the consumer.
“To my knowledge, no court has considered these as informative or binding,” Harold Geller said, “nor can the CLHIA disclosure requirements be considered to require meaningful disclosure understandable to the average purchaser of life insurance.”
Mr. Rogers said he would like to see a disclosure document provided to the client by the agent that lists the services the client will get, how and what he’ll pay for them, the agent’s qualifications (education and experience) and the procedure for making complaints.
Some MGAs are taking steps to protect themselves and the agents who work with them from liabilities that could arise from transactions with clients. Gary Goldshmidt, president of Stone-Hedge Financial Group Inc., a Toronto-based MGA, put a compliance regime in place when he set up his company a few years ago. Agents who work through his MGA have to document the client’s suitability for the policy or investment, and Mr. Goldshmidt has developed a guide to measure risk tolerance. Agents also provide clients with a disclosure document making them aware of the fees they are paying, and a privacy protection document. “Agents need to view compliance as an asset rather than a liability,” he added, “because agents as well as dealers can find themselves on the line.”
CAILBA is developing its new Compliance Toolbox (See The Insurance and Investment Journal, November/December 2010) to help MGAs set up compliance regimes. The first phase, being launched this spring, will supply MGA members with a generic set of compliance documents. Use of the toolbox won’t be mandatory, Mr. Lamarche said, “but rather part of suggested best practices.”