MGAs struggle with E&O burden

(June 14, 2005) Advisors who find their errors and omissions insurance (E&O) coverage too expensive can take comfort knowing they’re not alone — managing general agencies (MGAs) on the insurance side have the same problem.

“Underwriters fear uncertainty, they won’t assume any risk they cannot quantify and they decline the offering they cannot understand,” said Terry Taylor, COO and CEO of standards at Advocis. “They don’t understand what MGAs are, what they do, or how they do it.”

Taylor, speaking in a panel discussion at Changing Channels: Managing General Agencies at the Crossroads, an ADVISOR Group symposium held last week in Niagara-On-The-Lake, points out that there is little standardization among the MGAs, with each contract differing between carriers and agency. This leaves the E&O underwriter with no standard by which to gauge the individual risk posed by each agency.

“There are a number of issues that deal with liability,” says Klaus Zabel, partner at Marketing Concepts Group in Toronto. “It depends on how you operate — are you a wholesaler, are you a producer group, how many provinces do you do business in, how many lines of business are you in.”

With no benchmark to judge each agency against, underwriters often slap a high minimum premium on coverage, with little examination of the underlying business.

“When you come to the market, looking for coverage, he doesn’t know if you run a tight ship or a leaky dinghy,” Taylor says. “They have no benchmark to compare you with — there is no manual of best practices for the MGA.”

There was support at the symposium for drafting a best practices manual, so long as it was done at the industry association level, and not undertaken by the regulators.

“I think it’s long past due for MGAs in Canada to gather together to identify best practices, to implement those and then simultaneously meet with the underwriter, who has no clue about how we operate,” says David Juvet, managing partner, Ontario East Insurance Agency. “We can never absolutely protect ourselves from exposure, but we can certainly reduce it.”

Rather than crafting these best practices, the role of the regulator is seen to be stricter enforcement. If best practices and rules are more strictly adhered to, liability is diminished, hopefully making claims less frequent and less expensive.

“E&O insurance started with professional groups — engineers, lawyers, doctors — all of whom have a well-regulated, well-documented series of rules. The organizations responsible for enforcing those rules do so aggressively,” says Zabel. “I think there’s a role here for the various regulatory authorities to enforce the rules that exist. If they don’t, we’re going to have larger and larger E&O problems.”

Zabel says pricing for coverage of a mid-sized MGA is often “silly,” with $50,000 per annum in premiums and a $100,000 deductible being common. He says one of his supplier companies does offer E&O coverage to its MGA partners, but that he would not want to tie his coverage to one carrier.

“Any product that is out there has such pricing, that financially you’re almost better off to insure yourself, unless you think you have a potential large claim.”

Part of the pricing problem stems from the fact that there are so few MGAs in Canada. Canadian insurance companies call for higher premiums to offset the perceived risk of insuring such a small group.

In the U.S., there are far more agencies, making their E&O coverage more affordable. American insurers have offered various excuses to not enter the Canadian market, ranging from the small size of the market, to not wanting to deal with two languages.

Up to now, the problem has been that MGAs were being lumped together as an industry during the underwriting process. The insurance companies tend to look at MGAs and quote their minimum premium for the industry.

John Whaley, executive director of the Independent Financial Brokers of Canada (IFB), says the underwriter needs to look at each agency individually, taking into account the number of advisors it deals with, the number of contracts and their value, and the number of employees.

The Advocis Protective Association (APA), of which Taylor is the COO, has approached an underwriter that is interested in understanding the market better. To that end, APA has teamed up with CAILBA to form a task force to educate the underwriter.

“Certainly E&O insurance is probably the most contentious, yet most misunderstood issue of the day both from the point of view of the producer and the MGA,” says John Dargie, vice president, insurance, at IFB.

The IFB is also working toward an E&O product for MGAs, which Dargie says is “very close” to being launched.

“There is not a feasible product for mid-sized MGAs out there now, other than a product that’s reaching a price in the neighbourhood of $18,000 a year, with a $300,000 deductible,” said Dargie. “I don’t know how many people are prepared to write a $300,000 cheque, but I can tell you as an MGA, I am not.”

Smaller MGAs which cannot afford a corporate policy may try to circumvent this obstacle by taking out individual E&O coverage, with the lead agent listing themselves as “operating under the name of Insureco.”

“He didn’t buy E&O, he just bought a single policy and put a corporate name on it and paid $800,” says Whaley. “It gets him by the government, it gets him by the insurance company, but it doesn’t get him by if he gets sued.”

Whaley says IFB places its E&O insurance business through the New York head office of AIG, rather than through AIG Canada, because the U.S. office has a much better understanding of the business.

“The market hardens periodically, but it always softens. We had a tough time getting E&O for our guys, but in the end we got a good plan. Now we see it softening.”

Despite the often frosty relations between IFB and Advocis, Taylor says “it completely makes sense that we all cooperate and work together. If we can come up with an industry solution, that would be better for everyone.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(06/14/05)

Steven Lamb