A wave of consolidation among small managing general agencies (MGAs) is imminent, industry players say, as insurers adapt to increased regulation in the independent channel.

In May, the Canadian Council of Insurance Regulators’ (CCIR) released its final recommendations for the independent channel. Among those proposals, the CCIR called for insurers to ramp up their supervision of MGAs, as well as institute specific agent screening standards in their outsourcing agreements.

As a result of the new regulatory regime that the CCIR has set out, MGAs with fewer carrier contracts are questioning whether or not they want to stay in the business, says John Hamilton, president and CEO of Financial Horizons Inc., a large Waterloo, Ont.-based MGA that services 4,000 brokers. Hamilton has been a driving force in consolidation in the sector. Financial Horizons recently acquired Force financière Excel, a Sherbrooke, Que.-based MGA that served 1,800 brokers.

“As insurers increase the compliance demands they have on their MGAs to keep regulators satisfied, smaller MGAs will likely ask themselves if it makes business sense to invest and expand in their current compliance regime to hold on to their carrier contracts,” says Hamilton.

For example, the CCIR is recommending that all insurers mandate their MGAs to adopt the Canadian Life and Health Insurance Association Inc.’s (CLHIA) Guideline G8: Screening for Suitability and Reporting Unsuitable Agents. This would require MGAs to screen their agents on such criteria as criminal records and industry debt.

“If an MGA isn’t doing this already, it may be quite costly for them to start instituting these checks,” says Hamilton.

To remain efficient, brokers may veer towards larger MGAs that carry a full suite of products, or they may feel pressure to limit the number of MGAs they work with, stated the Independent Financial Brokers of Canada in its comments on the CCIR’s final review.

“If insurers and MGAs adopt measures to strengthen [compliance], in response to the [CCIR] recommendations, it could result in pressure for independent brokers to place business with a single MGA and smaller MGAs could be pushed out of the market,” the IFB noted.

Also contributing to the consolidation trend are new auditing requirements. As insurers are now required to regularly audit their MGAs, small MGAs could also see a lot of their resources going towards audits, says Byren Innes, senior vice president and director with Toronto-based insurance consultancy NewLink Group Inc.

“If I am a small MGA with 12 different contracts and it takes an insurer two weeks to complete an audit, all of sudden that’s 24 weeks a year that my compliance department is taken away from their day-to-day duties,” he says.

As a result, Innes says that insurers will likely reduce the number of MGA contracts they hold, and will only maintain contracts with larger MGAs.

Mississauga, Ont.-based RBC Insurance Co. was the first insurer to make this move — in August, it cut down the number of MGAs it contracted with to 14 from 83, keeping its largest distributors. Manulife Financial Corp. and Transamerica Life Canada, both based in Toronto, have also dialed back the number of MGAs they contract with in recent years, though less drastically.

“Regulation may not have been the sole driver of that move, but it’s likely a part of it,” says Innes.

This is the final article in a three-part series on insurance regulation.