Insurance regulators spotlight suitability

Advisors can expect more scrutiny in the future from MGAs.

The Canadian Counsel of Insurance Regulators (CCIR) recently released a position paper called The Managing General Agencies (MGAs) Distribution Channel in the Life Insurance Industry.

This was in response to the industry’s shift away from the traditional career agency model to the MGA distribution model.

Read: MGA regulation covers basic issues at consumer level

CCIR’s published views are often indicative of trends and future developments. An issues paper and a fact-gathering exercise through industry consultation preceded this position paper.

The position paper sets out a number of recommendations that are intended to enhance and harmonize best practices in the MGA distribution channel.

Read: MGAs speak out on regulation

Of particular interest to advisors are the following:

• Insurers must have effective systems and controls whenever they use the services of an MGAs;
• Insurers should incorporate the principles in CLHIA Guideline G8 ‐ Screening Agents for Suitability and Reporting Unsuitable Agents into all of their businesses across Canada, including any contracts involving the outsourcing of these functions to an MGA;
• Regulators should regularly review market conduct to determine if insurers and agents are providing consumers with adequate information to make informed purchasing decisions; and
• Provincial regulators should conduct on‐site examinations to make sure insurance companies are adhering to Guideline G8.

CCIR has rejected the securities regulatory model in which a sales representative must always act under the sponsorship of one dealer.

Instead, it’s suggested there should be a central registry to identify agents and brokers who have engaged in misconduct. CCIR has referred this recommendation to its Disciplinary Information Committee.

Read: Tighter regulation for insurance?

As the industry responds to the recommendations, insurers will likely seek more diligence and contractual guarantees from MGAs with respect to agent oversight.

Consequently, MGAs will scrutinize advisors more closely in future as they seek to discharge their more explicit contractual obligations to insurers.

CCIR has consistently stated its concerns about the sales practices of independent advisors, partly based on concerns expressed by consumer groups and also on previous regulatory violations. Some provincial regulators, such as the Financial Services Commission of Ontario, have highlighted the issue of product suitability as part of their strategic priorities.

This summer, the Insurance Council of B.C. released its expectations for the roles and responsibilities of MGAs, which include the scrutiny of agent and product suitability.

Insurance regulators say independent agents selling the products of multiple insurers are not consistently ensuring consumers are buying the most suitable products.

Whether that view is correct or not, insurers and their MGAs will face regulatory demand for more oversight.

Possibly, further legislative and regulatory action may ensue if there is a perceived inadequacy in the industry response.

Jill McCutcheon is a partner at Borden Ladner Gervais LLP’s Toronto office. Jill practices in the areas of corporate and regulatory insurance and can be reached at jmccutcheon@blg.com or at 416.367.2161