Is MGA oversight good for insurers?

Canadian insurance regulators are taking a closer look at life insurers’ use of MGAs.

In February 2011, the Canadian Council of Insurance Regulators (CCIR) announced it wanted to boost oversight of Canada’s growing MGA distribution model. After releasing a series of position papers, the council adopted final guidance for insurers in November 2012.

And now, the B.C. Financial Institutions Commission (FICOM) wants to further define the roles and use of MGAs for that province’s authorized insurers. In June 2013, the commission issued fresh draft guidance that more specifically prescribes how B.C. life insurers must select and oversee MGAs.

FICOM’s guidance analysis says, “Life insurers in Canada have increasingly used MGAs to assist in distribution [since the late 1990s]…to meet marketplace challenges [like] economies of scale, cost control and heightened competition.”

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But, the commission adds, “These arrangements can increase an insurer’s dependence on the MGAs and may increase the insurer’s risk profile if the arrangement isn’t properly managed.”

Paul Brown, CEO of IDC Worldsource, says the attention being given to MGA oversight guidelines is important since, in the end, further defining the relationship between MGAs and life insurers will help better protect consumers, as well as boost industry efficiency.

To date, he says those in the MGA business have had to “operate without clear, [streamlined] definitions of their roles and responsibilities” as a result of broad industry rules and practices (for more on the view of MGAs, read last year’s MGAs speak out on regulation).

Mixed industry reviews

During the comment period on FICOM’s proposed guidance (ended July 26, 2013), the Canadian Health and Life Insurance Association (CLHIA) stated the commission should wait to adopt altered industry standards, given CCIR’s guidance was recently enacted.

In a comment letter, CLHIA details how it worked closely with CCIR on its MGA research and resulting 2012 guidance, which will be fully implemented by the end of this year or early next. Only after this process is completed, says the association, should further guidance be offered.

But FICOM has released new proposed guidelines for B.C. insurers because, it says, “The CCIR paper…doesn’t provide sufficient guidance on what should be considered best practices, nor [does it] offer guidance for an insurer’s strategy, internal processes or controls.” It intends to release its own guidance that also incorporates CCIR suggestions.

Contrary to CHLIA, Toronto law firm Cassels Brock Blackwell supports FICOM’s current efforts. In an online post that reviews FICOM’s proposed guidance, the firm says life insurers need more direction from regulators.

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For example, the law firm says insurers authorized in jurisdictions like Ontario are required by insurance regulators to implement systems that screen MGAs for suitability and report errant behaviour. As a guide, it says many companies have used CHLIA guidelines about MGA use that were developed in 2009.

And this isn’t enough, the law firm says, since CLHIA guidance “simply lists situations that would make an MGA unsuitable,” while FICOM’s new guidance provides “a more robust list of due diligence considerations.”

What’s more, it says, “The CLHIA [guidance] is largely silent on the required contents of an insurer’s agreement with an MGA, but the draft guideline provides a detailed list of what should be included in such agreements. Also, [FICOM’s guidance] includes greater detail as to the elements that should be included in the ongoing monitoring process of an MGA.”

If FICOM’s guidance is adopted, Cassels Brock Blackwell says the final paper “will impose upon life insurers [authorized in B.C.] a higher degree of responsibility when it comes to…MGAs through which their individual life insurance products are sold. They’ll be required to devote more energy and resources to developing and maintaining [compliant] policies.”

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Brown says potentially higher compliance fees shouldn’t be a concern. “There may be a little bit of beefing up [of compliance], but companies will be more efficient. They’ll increase the quality of their business relationships. [Higher costs] wouldn’t cripple the industry in any way and are a natural progression.”

He adds the added benefit of enhanced MGA guidelines is insurers, and ultimately advisors, will be able “to build systems that protect their businesses and clients, as well as reduce potential legal costs.”

FICOM says the guideline will become effective immediately once adopted.

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