Regulators put onus on insurers for MGA oversight

By Alain Thériault | May 22 2012 04:12PM

In its recently released position paper, the Agencies Regulation Committee (ARC) proposes that insurers be made responsible for the supervision of their managing general agents’ activities.Sponsored by the Canadian Council of Insurance Regulators (CCIR), the ARC has outlined four recommendations whose principles are meant to guide provincial regulators when governing the activities of managing general agents.

The first three recommendations suggest that insurers monitor their distribution partners more closely. The ARC recommends that insurers chose the MGAs with whom they do business more carefully, provide better oversight, and ensure the suitability of the products they are selling on their behalf. The fourth recommendation deals with the collection and preparation of information on MGAs and advisors that will soon be required.

In its first and most detailed recommendation, the ARC outlines best business practices for the relationship between the insurer and the MGA.

The ARC proposes that the insurer only choose an MGA after conducting due diligence. In an appendix outlining some of the criteria that should be considered, the ARC suggests insurers assess, amongst other things, the MGA’s experience and technical competence, its financial strength and capacity, its business reputation, as well as its internal controls, reporting and monitoring environment, and the contingency measures it has put into place to ensure the continuation of its contracted activities in the event of problems or emergencies.

Having conducted this due diligence, the insurer must then draw up a contract with the managing general agent that clearly defines the roles and responsibilities of each party.

According to the ARC, there are several areas that an agreement between the insurer and the MGA should cover. It should establish the performance measures and reporting requirements that will be used to determine if parties are meeting their commitments. It should also provide mechanisms for dispute resolution, notification of the termination of salespeople, and the handling of complaints from clients.

In this section, the ARC suggests that the agreement should cover contingency planning, the rights of an insurer to examine, review or audit the MGA, confidentiality requirements, and the methods used for calculating fees and compensation. The agreement should also require MGAs to maintain professional liability insurance and all appropriate licences, and to pre-approve all advertising through the insurer.

Finally, insurers must ensure that its MGAs perform the tasks they have been delegated in accordance with the regulations. “Monitoring may take the form of reports, regular, formal meetings with the MGA staff and/or periodic reviews of the arrangement’s performance measures,” says the ARC. “Reviews of MGA arrangements should be periodically undertaken by the insurer’s internal audit department or another independent review function, either internal or external to the insurer, provided it has the appropriate knowledge and skills.”

Duty of care obligation

In its second recommendation, the ARC urges insurers to monitor their managing general agents according to the Canadian Life and Health Insurance Association’s (CLHIA) guideline LD8. This guideline focuses on the selection of agents (which the CLHIA defines as “advisors” or “representatives”) and the reporting of irregularities. The ARC paper says that insurers have a “duty of care” obligation to ensure that the agents selling its products are suitable, and that insurers are also obliged to report misconduct to regulators. “This duty of care obligation is already recognized by law in some, but not all, jurisdictions,” notes the ARC.
In its third recommendation, the ARC invites provincial regulators to regularly review industry practices regarding product suitability. This means that regulators will have to determine if insurers and their agents are providing consumers with adequate information to make informed decisions, and suitable product recommendations.

“The objective is to understand and assess the processes agents use in making recommendations to consumers, and making sure these are effective taking into consideration the increasingly complex products in today’s insurance marketplace,” reads the position paper. “If regulators’ monitoring of the marketplace identify problems in the future that require additional action, further steps can be taken.”

In its fourth recommendation, the ARC outlines the kind of information insurers should be collecting about agents and their advisors. The position paper says that regulators “must have a clear understanding of who are those individuals or companies currently licensed as insurance agents in their jurisdiction”. This includes knowing about their business model and the role they play in the distribution of life insurance products. The ARC says that it will work with CISRO (Canadian Insurance Self-Regulatory Organization) to make sure this market intelligence is gathered “in a timely manner.”

The ARC is accepting written submissions and comments on its recommendations, which must be received by June 1. After having reviewed submissions, it will ask the Canadian Council of Insurance Regulators to adopt the recommendations.

Each province will then conduct a review to assess the situation for its own jurisdiction, and determine what changes it will make to its regulations.

Provincial initiatives

The provinces are ahead of the game. The ARC paper reveals that the Financial Services Commission of Ontario (FSCO) is currently conducting product suitability tests as part of its strategic priorities for 2012.

In the draft version of its Statement of Priorities for 2012, the Ontario insurance regulator says that it plans to carry out market conduct reviews to determine how the life insurance industry is ensuring that consumers get the information they need to make informed decisions when buying life insurance products.

“The focus of the review will be to understand and assess the processes life insurance agents use in making recommendations to consumers and the processes in place at life insurance companies when developing and distributing products,” reads the FSCO document. “The review will also consider the actions life insurance agents and companies are taking to support the financial literacy of their clients.”

The Insurance Council of British Columbia made ​​history in January when it enacted its own rules for the supervision of managing general agents (see The Insurance and Investment Journal, February 2012). Focused on product suitability and better supervision of advisors, its regulation made insurers more responsible for their MGAs.

For their part, the managing general agents of Quebec recently submitted their own proposed model for the regulation of distributors. The group that represents Quebec MGAs hopes that, by doing so, it can influence the province’s financial markets regulator, the AMF, in its approach (see article page 16).

Related to the same topic …