Although industry associations support the Canadian Council of Insurance Regulators’ (CCIR) call for tighter controls and standards for insurers working with managing general agencies (MGAs), some insurers want more clarity in the definition of an MGA before they begin redrafting their outsourcing agreements.

The CCIR solicited feedback early this summer from the industry on its final recommendations for the independent channel. The proposals were outlined in a paper entitled, “The Managing General Agencies (MGAs) Distribution Channel in the Life Insurance Industry”, released on May 4.

Most industry associations and firms that submitted comments to the CCIR were generally in agreement with the two recommendations that would require immediate action by insurers. The recommendations are that:

• Insurers must have in place effective systems and controls when they use the services of an MGA, which should be detailed in their insurer-MGA agreements; and,
• Insurers should incorporate the principles in CLHIA Guideline G8 – Screening Agents for Suitability and Reporting Unsuitable Agents into all of their business across Canada, including any contracts involving the outsourcing of these functions to an MGA. This involves screening agents for work experience, criminal records, industry debt and other criteria.

The organizations in agreement with these recommendations include the Financial Advisors Association of Canada (Advocis), the Canadian Association of Independent Life Brokerage Agencies (CAILBA) and Canadian Life and Health Insurance Association Inc. (CLHIA).

CLHIA said in its comments that the majority of insurers already use CLHIA’s Standardized MGA Compliance Review survey to meet the first recommendation. Secondly, many insurers already work only with those MGAs that have instituted CLHIA’s Guideline G8.

CAILBA also agrees with the two recommendations. It emphasizes that there’s an important difference between obligations that are implied and ones that are explicitly stated.

“Insurers should adopt CLHIA Guidelines across Canada that include formal rather than implied contractual obligations to MGAs,” said Paul Brown, president of CAILBA, in the group’s submission.

Some insurers, however, appear to have reservations about meeting the first recommendation.

Kingston, Ont.-based Empire Life Insurance Co. wants to see more clarity in what the CCIR defines as an MGA and the degree of detail it wants in MGA contracts.

In its report, the CCIR noted that “existing insurer MGA contracts are too vague and generic, leaving MGAs uncertain of what the insurers’ expectations are in respect of the functions delegated.”

“We don’t know what they mean by vague – are they referring to a specific clause or an entire area?” said Rick Forchuk, vice president of retail insurance distribution at Empire Life, in an interview. “We’ve suggested that the industry agree on a common definition of what an MGA is.”

Added Forchuk: “Before changing agreements, we want to see regulators define that an MGA is not one guy working in his basement with an agency agreement; it’s a full service organization that recruits and educates brokers, as well as has a compliance department.”

Winnipeg-based I.G. Insurance Services Inc., the insurance subsidiary of IGM Financial Inc. (Investors Group), went a step further — it wants to see the CCIR institute a licensing regime for MGAs. This would include a requirement for certified MGAs to meet specific compliance conditions, such as minimum capital requirements and specific reporting and governance standards.

“The disparity in the current territorial regulations with regard to MGAs should be analyzed and uniform regulation should be adopted,” I.G. Insurance Services said.

The Independent Financial Brokers of Canada supports the CCIR’s attempt to improve standards in the independent channel. However, it expressed concerns that tighter insurer-MGA contracts could make it harder for brokers to sustain their relationships with a number of MGAs, which could prevent them from making transactions in the best interest of their clients.

“Our concern is that as efforts to reduce market risk and compliance take hold, [brokers may find] being able to conduct …[specialized] transactions will become difficult or even obsolete,” the IFB said.

This is second in a three-part series on insurance regulation. Tomorrow: industry consolidation.