The independent life insurance distribution business can expect a challenging year in 2018. Major regulatory changes are driving increased compliance responsibilities, and independent firms face fierce competition as insurance carriers expand their distribution capabilities by acquiring managing general agencies (MGAs).
MGAs have been squeezed in recent years by a growing list of compliance issues, including anti-money laundering legislation, privacy rules and a focus by regulators on matters such as insurance advisor oversight, sales practices and treating consumers fairly.
“There’s been a lot happening in the past few years, and I think that’s just going to accelerate,” says Paul Brown, chairman and CEO of Mississauga, Ont.-based IDC Worldsource Insurance Network Inc. in Vancouver.
Segregated funds face major new disclosure requirements, and the rules surrounding advisor compensation soon could be revised. MGAs in Saskatchewan – and possibly other provinces – face new regulatory obligations, including a new licensing regime.
MGAs and advisors also are adapting to new sales practices mandated by many carriers. Advisors are required to provide every client with a so-called “reason why” letter following the sale of an insurance policy.
“Staying up to date on every compliance responsibility is getting harder and harder for agencies,” says Adrien Legault, chief compliance officer at Aurrea Signature, an MGA based in Boucherville, Que. “We touch [on] so many different fields – privacy laws, distribution laws, mutual funds, etc.”
The result is steadily rising operating costs, which has hit small MGAs particularly hard. That has led to the acquisition of many smaller MGAs by larger firms seeking to grow economies of scale.
Recently, even large MGAs have been acquisition targets as insurance carriers expand their distribution activities. In 2017, Winnipeg-based Great-West Life Assurance Co. acquired Kitchener, Ont.-based Financial Horizons Inc., one of Canada’s largest MGAs. In addition, Quebec City-based Industrial Alliance Insurance and Financial Services Inc. completed its acquisition of Toronto-based HollisWealth Inc., which has an MGA in its stable.
Other carriers are likely to explore their own MGA acquisitions in the year ahead, Brown says. That will make competition even tougher for small, independent MGAs.
In addition, MGAs face the prospect of gaining substantial responsibilities related to advisor oversight. Under the existing regulatory framework, insurers are responsible for advisor oversight. But that model is being reconsidered.
Saskatchewan, for example, is establishing a formal regulatory regime for MGAs. The Saskatchewan Insurance Act, expected to be proclaimed this autumn, includes a new licensing category for MGAs and obligations for MGAs to perform ongoing monitoring of their agents.
The Canadian Life and Health Insurance Association Inc. (CLHIA) is pushing for a similar regime to be adopted across the country. In Improving Advisor Oversight: Helping Consumers to be Sure They’re Secure, a position paper released last year, the association suggests that MGAs may be in a better position than insurance carriers to monitor advisor conduct.
The CLHIA paper recommends establishing a licensing regime for distribution firms and making these firms formally responsible for certain aspects of insurance advisor oversight. The proposals set out in the paper include requiring every advisor to designate a “primary” MGA, which would assume oversight responsibility for that advisor and conduct on-site practice reviews.
These proposals have garnered mixed reactions from the industry. Brown acknowledges that changes to the current model are necessary to clarify responsibilities. However, the CLHIA’s proposed model, in which primary and secondary MGAs would collaborate on oversight activities, may be difficult to put in place, he says: “I’m not sure how realistic that approach is.”
A more formalized set of regulatory responsibilities for MGAs would be beneficial, says Legault, noting that under the current framework, MGAs are limited in their ability to exercise authority over advisors because the former don’t have formal responsibility to do so.
The CLHIA is expected to take further action on this issue this year.
Advisors also should be prepared for possible changes to the rules surrounding compensation and sales incentives in 2018. Quebec’s insurance regulator, the Autorité des marchés financiers, published a paper in 2017 examining the potential for conflicts of interest related to incentives. As well, the Canadian Council of Insurance Regulators also intends to focus on this issue.
In addition, with securities regulators exploring the possibility of banning embedded commissions, there are likely to be repercussions for comparable products in the insurance realm, such as seg funds, says Byren Innes, senior strategic advisor, financial services consulting and deals, at PricewaterhouseCoopers LLP in Toronto: “Anything that impacts the wealth-[management] side is going to impact MGAs.”