A change in the oversight of managing general agencies may be in the works. The Office of the Superintendent of Financial Institutions says that insurance companies could be responsible for some aspects of how MGAs are run; that’s because MGAs could be considered third-party service providers under OSFI guidelines.

MGAs, a fast-growing independent distribution channel for insurance companies, are currently not subject to regulation. However, their activities seem likely to receive greater scrutiny in the future.

The oversight of MGAs is currently the subject of a review by the Canadian Council of Regulators; the CCIR is a national regulatory group that represents all of the provincial and territorial insurance regulators. The CCIR initiated a review of the MGA distribution channel last year. It wants to gain a better understanding of the role that MGAs play in the underwriting process. The CCIR also says it wants to discuss whether or not there is any reason to believe that consumers might be at risk because of the relationship between insurers and MGAs.

The CCIR has put together an industry group to consider greater oversight of MGAs, including: Advocis, the Independent Financial Brokers of Canada, the Canadian Association of Independent Life Brokerage Agencies and the Canadian Life and Health Insurance Association Inc. These organizations all have made submissions to the CCIR, which had said it plans to deliver a consultation document for further consideration this autumn.

So far, there has been no word from the CCIR on the status of that discussion paper. However, the paper will reflect the debate that’s been simmering in the insurance community since at least June of this year. That’s when Douglas McLean, executive director of insurance for British Columbia’s Financial Institutions Commission in Surrey, B.C., had suggested that insurers could be overseeing MGAs, given the provisions of OSFI’s Guideline B-10: Outsourcing of Business Activities, Functions and Processes. That guideline, which applies to financial services companies, sets out in detail the expectations for the oversight of third-party service providers.

McLean, who is leading the CCIR review, had said that recent provincial enforcement action in B.C. revealed that MGAs could constitute “significant reputation risk” in contracts between insurance companies and MGAs, the latter of which may be considered to be outsourced vendors. In the event that OSFI Guideline B-10 is applied in the future, the test that will trigger its provisions is whether or not an insurer’s dealings with an MGA are “material” to the insurer’s overall business. Insurers have the responsibility of deciding which of its dealings with MGAs are “material” under the guideline.@page_break@While the regulatory climate in general is becoming tighter, MGAs are also attracting attention from regulators because of their success. Some Canadian MGAs are now large businesses that process policies involving the participation of 4,000 or more insurance advisors.

But while the advisors are licensed under provincial legislation, the MGAs themselves are not. This gap in the regulatory net exists even though 45 MGAs now conduct about 75% of all life and health insurance policy applications, according to CAILBA, the industry association for MGAs.

OSFI Guideline B-10 applies to all “federally regulated entities,” including banks and insurers. The 22-page document says that these entities should have a process for applying the “material” test to their relationship with their third-party service providers.

If a relationship is found to be material, the entity (that is, the insurer) should, the guideline says: “…implement a program for managing and monitoring risks, commensurate with the materiality of the arrangements.”

In an email response to questions from Investment Executive, Wendy Hope, vice president of external relations for the CLHIA, says that organization doesn’t want to speculate about the content of the CCIR’s anticipated discussion paper.

But she also dismissed the possibility that OSFI’s outsourcing guideline could apply to the oversight of MGAs by insurance companies. That’s because the guideline lists brokers and agents as examples of outsourcing arrangements that the guideline does not apply to. As a result, Hope says: “Therefore, [the guideline] does not, in turn, apply to MGAs. MGA-related issues are a matter of provincial jurisdiction.”

However, this month, OSFI communication specialist Jean-Paul Duval confirmed in an email to IE that Guideline B-10 indeed applies to: “…any activities outsourced to an MGA. Therefore, if the activity is deemed material, the [insurer] is expected to follow the risk management program outlined in Guideline B-10.”

Duval’s email added that “reputation risk” isn’t a category on its own, but rather “a consequence of each of the other risk categories.”

Guideline B-10 describes a multi-faceted risk-management program for insurers that do business with third parties. This includes an insurer’s expectations for auditing, monitoring and oversight, and business continuity in the event that a vendor goes out of business.

In a CAILBA review of MGA contracts in 2009, Peter Lamarche, president of CAILBA, noted insurers have effectively downloaded more responsibilities to the independent distribution model offered by MGAs, including for example, the policy application process.

But sometimes these initial insurance contracts include topics such as complaint-handling and even broad statements about product suitability — two items that sound a lot like a regulatory consideration that MGAs currently deal with. Now, Lamarche says, MGAs also would like their oversight roles defined.

McLean noted other considerations that might be addressed in the CCIR’s discussion paper: MGAs aren’t licensed; and because of that, their owners and directors aren’t required to meet any additional education standards. As well, considering the amount of business that MGAs do, he had added, some might require higher levels of errors and omissions insurance. IE