Managing general agencies (MGAs) have undeniably grown in importance in the distribution of life and health insurance. The Ontario Ministry of Finance says today life and health MGAs are the main distribution channel for insurers, accounting for 65 per cent of all new life and health insurance premiums in Canada – business that is reportedly worth $2.4-billion annually.
With the province’s Insurance Act having been drafted prior to the existence of MGAs, associate general agencies (AGAs), national accounts and other entities, however, it has limited bearing on such companies – insurers must be licensed and agents are required to be licensed, but this influential middle layer for years has been left to its own devices.
“We still like principles-based, but there needs to be some strong minimum standards. You can’t just say ‘do what you like’ because everybody will interpret it differently.” - Phil Marsillo
A slow change process, however, has also been underway for a number of years. The process has included fact-finding by the Financial Services Regulatory Authority of Ontario (FSRA) in cooperation with the Canadian Council of Insurance Regulators (CCIR), followed by a report stating that the regulators found evidence of unfair consumer treatment and poor conduct on the part of some MGAs and their agents, along with deficiencies in some insurer’s oversight of life and health MGAs. This culminated in a recent announcement made by Ontario’s Ministry of Finance at the beginning of the summer, proposing a new licensing regime for the intermediaries.
Focusing strictly on the life and health MGA licensing proposal, some industry players say their organizations have specifically asked for MGA licensing.
Phil Marsillo is president and chief executive officer for IDC Worldsource Insurance Network Inc. He is also president of the Canadian Association of Independent Life Brokerage Agencies (CAILBA). He says strong minimum standards are needed. “We’re looking for uniformity in the industry of all distribution organizations,” he says. “That’s why we said if you’re going to open this, you might as well go the whole way and issue a life MGA license.”
In particular, he says the legislation should not leave matters open to interpretation. He says in systems where organizations can do as they see fit, based on their own size and complexity, every player will have a different idea of what compliance looks like.
“We still like principles-based, but there needs to be some strong minimum standards. You can’t just say ‘do what you like’ because everybody will interpret it differently. There’s got to be some standardization.” Later in his discussion with the Insurance Portal, he adds that the roles and responsibilities of each constituent or stakeholder should be spelled out. Similarly, he says if the regulator is going to be interpreting carrier-MGA contracts, guidelines for these, along with different accountability expectations should also be spelled out. “We don’t want it to be left to interpretation,” he says.
Today’s contracts and responsibilities
Alana Scotchmer, partner with Gowling WLG, points out that it’s part of an insurer’s regulatory obligations to manage third-party risks, which includes the insurers’ distribution channel.
“The way insurers deal with that right now is through contract,” she says. “If the insurer needs to make sure that products are being sold fairly and that they’re not discriminating against customers – the whole range of things that an insurer needs to deal with – they would push that down to the MGA through contract. But that really leaves it up to the individual insurer and the (resulting) approaches can be really different, from insurer to insurer and from MGA to MGA.”
The end result, she adds, is a wide variety of approaches and agreements. Some insurers oversee their MGAs well. Others, meanwhile, delegate insurer functions to the MGA without having knowledge of what’s happening at the MGA level, “which is problematic.”
And while regulatory frameworks do need to be somewhat flexible to take into account the fact that different players treat things differently, she adds that when a uniform result is desired, this is not an efficient way to regulate.
Under the current system, this wide range of approaches results in a field that is extremely uneven. “There have been a lot of negative stories about consumers recently and life and health insurance products,” she says.
“A couple of bad apples spoil it for everybody. I think most are doing a pretty good job. This will make them do a better job.” - Naunidh Hunjan
Although he says the majority of the industry is doing a good job for clients (Marsillo says the same – pointing out that the industry paid out more than $16-billion in death benefits in 2022 with little fanfare and few issues), Naunidh Hunjan, chartered life underwriter and president of AGA firm, Hunjan Financial Group Inc., is a wholehearted supporter of the new licensing regime. “A couple of bad apples spoil it for everybody. I think most are doing a pretty good job. This will make them do a better job,” Hunjan says.
He points to recent news stories where both an MGA and an insurer allowed an agent to earn significant commission without a license.
Cost savings
One of the promises of the new regime, FSRA says, is some cost savings, thanks to standardization. Hunjan adds that the cost savings will also accrue as representatives who might otherwise be a liability, are weeded out by the system.
Having witnessed similar regulatory changes to the securities side of the business in years past, Hunjan says he expects those who practice part-time (holding a life license in addition to a realtor job, for instance) could be forced to either choose the profession and its related obligations, or relinquish their licenses.
“It’s going to make us more efficient. People who couldn’t handle the compliance, they just left the business,” he says
“They have way more compliance requirements on that side,” he adds, referring to the securities side of the industry. “It’s coming to the life side. When I saw it, all the part-timers got weeded out, and it made the people that were already good, more efficient. They ended up making more money because they were forced to spend more time in their business because of compliance.”
Both Hunjan and Scotchmer say the new regime will likely make the whole system stronger. The only con Scotchmer says might be the cost of compliance. “Anytime you have increased regulation, that means people have to spend more time and resources on complying,” she says. “Costs get passed down to consumers, albeit very indirectly, but it just ends up costing everyone more because it takes more time and energy to be able to comply.”
“Adding that layer of complexity to a business often means that some of the smaller players get pushed out.” - Alana Scotchmer
It's also noted that the costs of compliance could put further pressure on smaller players. “Adding that layer of complexity to a business often means that some of the smaller players get pushed out,” she adds.
Hunjan says eventually when the dust settled in the securities industry, the changes were positive – the questions which advisors were suddenly required to ask their clients lead to more business and created more opportunities. “It gave us the ability to provide more value to our clients. I’m pretty sure that’s what’s going to happen here.”
MGA licensing in other provinces
In Canada, MGA licensing requirements are currently in place in Saskatchewan and New Brunswick, while Manitoba, British Columbia and Ontario are in different phases of exploration.
“The risks are the same from place to place, right? Ontario is finding there are risks in the distribution channel and most insurers operate across the country,” Scotchmer says. “If there are risks that are inherent in the distribution channel, other regulators will be looking at this.”
As for how quickly such developments come to pass, she points out that in Ontario the process began with information gathering several years ago and a change still needs to be made to the province’s legislation to recognize the regulator’s new oversight – a process which could easily be derailed by an election, for instance. “It’s a bit hard to predict,” she says.
The Canadian Life and Health Insurance Association (CLHIA) representing insurers was unable to comment until after the deadline for commentary to the Ontario Ministry of Finance passes – comments are due to the ministry before the end of September 9.
Is change coming for P&C MGAs too?
Interestingly, although this current effort is strictly focused on life and health MGAs – property and casualty (P&C) MGAs are specifically noted as being distinct from life MGAs, despite the industry’s use of the same terms to describe them – a similar process would appear to be underway for P&C distributors, as well.
In February 2024, FSRA published its supervision plans for P&C insurers which gives details of an upcoming review of P&C insurers and their outsourcing arrangements with MGAs.
Alana Scotchmer, partner with Gowling WLG says the size and scope of the P&C MGA market is being scrutinized. Questions from the regulator are expected to focus on due diligence on the part of insurers who are selecting MGAs for outsourcing, on oversight practices for outsourced functions and on business practices that may create a higher risk for consumer harm.
“FSRA has identified multiple areas of potential customer harm where insurers outsource functions to MGAs,” she writes in the March 2024 note, entitled FSRA to Conduct MGA Review to Ensure Fair Treatment of P&C Insurance Consumers in Ontario. Non-disclosure of conflicts of interest, delays in accessing coverage, customer complaints, claims management, the adequacy of existing error and omissions (E&O) insurance and other elements are included in the information the regulator is expected to be asking about.
“MGAs are absolutely huge in the property and casualty side, as well. FSRA has just started the process of collecting information about what MGAs are doing there too. I’m wondering if it’s going this way on that side, as well,” she says.
Related:
- Managing general agencies: A closer look at Ontario’s proposed licensing requirements
- Regulator says troubling practices in life and health insurance are harming consumers
