MGAs ask insurers for contract changes regarding advisor supervision

By Donna Glasgow | May 27 2008 02:55PM

After carrying out a comprehensive review of insurance carrier contracts with managing general agencies (MGAs), the Canadian Association of Independent Life Brokerage Agencies (CAILBA), is asking insurers to consider making certain changes to their contracts.

Terri DiFlorio, president of the association which represents MGAs, and president of Hub Financial and Hub Capital, says of chief concern is a provision found in the great majority of carrier contracts that puts responsibility for supervising advisors on MGAs. CAILBA would like to have the word "supervise" changed to "manage."

CAILBA’s carrier contract review involved 12 insurance company contracts and was completed late last year. The review was undertaken because the world in which MGAs operate is changing at a fast pace, yet many insurer contracts – some of which were written a decade ago – do not reflect the present business environment.

Define supervise

For instance, the use of terms such as "MGAs will supervise agents" is problematic. In an evolving regulatory environment "supervision has taken on a whole new meaning," says Ms. DiFlorio.

CAILBA’s position is that while MGAs can manage an independent advisor’s business that goes through the agency, it would not be possible to supervise the advisor’s day-to-day work.

CAILBA is now meeting with insurers to discuss this and other contract concerns. As of early April, Ms. DiFlorio said four meetings had been held.

One of the main goals of these meetings is to clarify what the insurers’ expectations are in terms of supervision, she says. CAILBA would like insurers to state what they believe MGAs should be doing in this respect, so that it can communicate this information to members. In a sense she says, "it is irrelevant whether we agree or not, we have a contract."

However, CAILBA says clarifying expectations is important "so everyone understands their job description." This is important not just for insurers and MGAs, but also for consumer protection, she adds.

Beyond clarifications, CAILBA is also hoping to convince insurers to make contract changes. She said the four insurers met with so far have been "very receptive…One has said it makes sense. We’re working on the others."

The company that agreed it makes sense is Empire Life. In fact, the insurer has agreed to incorporate the changes requested by CAILBA into its contract, including removing the word supervision."The timing was just right. We were finishing off our new contract, we sought a legal opinion and decided that manage is an adequate word. We have chosen to take out supervision," said Rick Forchuk, associate vice-president, individual distribution at Empire Life, told The Insurance Journal. "We thought it was a fair request."

While his company expects MGAs to manage advisors in terms of ensuring they are compliant, such as being licensed and having errors and omissions insurance, the insurer does not expect them to supervise independent advisors’ daily activities.

He adds that making this change is an effort to avoid confusion between what Mutual Fund Dealers Association regulations require from dealers in terms of supervising advisors, i.e. auditing daily transactions, and what the Insurance Act requires.

The Insurance Act does not have the same requirements of MGAs. Mr. Forchuk adds that Empire Life felt comfortable in making this change now because it has become clear from a regulatory perspective that the onus is on the independent advisor to be compliant, to put the best interests of the client first, etc. "The MGA as an entity is not recognized by regulators in a supervisory role."

However, there is concern that if the word supervision remains in the contract, then down the road someone at the regulatory level may take it to mean that MGAs are obliged to inspect every transaction, he explains.

That being said, Mr. Forchuk says replacing the word supervise by manage offers no guarantees since the words are rather close in meaning. "We really are splitting hairs here."

What is going to matter most is what the courts decide about MGAs’ duty-of-care responsibilities over agents if a case goes to court that raises that question, he says. "Without such a decision, we’re just speculating."

With respect to Empire's decision to make the contract change requested by CAILBA, Mr. Forchuk says "it’s important to stress that this is how we see the issue, but that each carrier will have to come to its own conclusion."

David Gray, vice-president, wholesale distribution for Sun Life Financial, also spoke with The Insurance Journal on the issue. He says that the company had "an open and candid conversation" with CAILBA about contract concerns and Sun Life is now reflecting on the issues raised.

He adds that he is supportive of the association’s initiative and understands that contracts are written at a certain point in time and that times change. "We are absolutely considering it. We want to make sure we treat our distribution partners fairly and that we do the right thing."

CAILBA’s contract review also unearthed various other contract concerns that the association is also discussing with insurers, such as one carrier’s seven-day contract termination clause. "We’re very concerned about that." The usual termination clause gives 60 days notice and the range is from 7 to 120 days, adds Ms. DiFlorio.