THE ROLE OF MANAGING GENERAL AGENTS

THE ROLE OF MANAGING GENERAL AGENTS

BACKGROUND AND INTRODUCTION

During the investigation of two recent complaints involving life insurance business placed through Managing General Agents (“MGA”), questions arose regarding the respective roles and obligations of the life insurance agent and MGA in the insurance transaction. These two complaints, along with recent comments from Council members that they had occasionally encountered challenges when dealing with an MGA, indicated a review of the issue was warranted. The matter was subsequently discussed at a Council meeting, where it was suggested that a roundtable discussion be organized to “examine the respective roles of MGAs and life insurance agents in greater detail with the intent of bringing awareness to the above issue, to clarify the role and relationship of the MGA and life insurance agent, and to suggest ways in which MGAs and life insurance agents can work more effectively for the benefit of the client”. Council also identified this as an emerging issue at its June 2003 Annual General Meeting.

The roundtable discussion took place on September 10, 2003, with participation from MGAs, independent insurance life agents, insurance companies, and industry associations. Voting and non-voting Council members were also consulted throughout for information and expertise. A final report was reviewed by the full voting Council who approved proceeding on the basis set out below.

CURRENT REGULATORY STRUCTURE

There is some misconception regarding the regulatory structure in British Columbia as it pertains to MGAs. By way of example, the following headline appeared in a recent edition of the Investment Executive, an insurance and financial periodical:

MGAS THRIVE IN INDUSTRY’S “WILD WEST”

“Managing General Agents, the middlemen in the sales process, are unregulated. But no one seems to care.”

The following are some additional quotes from the article:

“Managing General Agents live a life that securities and mutual fund dealers can merely dream about – largely unregulated, essentially undefined in the legislation. And they are thriving. But given their growing importance as distribution conduits in the life business, should they come under regulatory oversight?”

“They form a critical link in the sales process but, for the most part, the business goes on without much scrutiny from regulators.”

“MGA’s are more or less unknown in insurance legislation. Because there is nothing in the legislation that defines an MGA, they face no special rules or regulations….It’s the wild west out there.”

“The only requirement regulators make of MGAs is ensuring that a life company does not pay compensation for acting as an agent to an entity without an agent’s licence.”

“…if MGAs provide only administrative services in the distribution process – and don’t act as conduits for compensation – they aren’t even required to be licensed as agents.” While the above may (or may not) reflect the regulatory structure in other provinces, it does not accurately describe the model in British Columbia.

In B.C., MGAs are subject to the same licensing and regulatory requirements as all life insurance agents. The corporate entity must be licensed as a life insurance agent, appoint a licensed nominee, and be sponsored by a life insurance company. Any MGA employees acting as life insurance agents as defined in the Financial Institutions Act (the “Act”) must also be licensed as life insurance agents. Insurance agent is defined in the Act as:

a person, other than an insurance company or an extraprovincial insurance corporation, who solicits, obtains or takes an application for insurance, or negotiates for or procures insurance, or signs or delivers a policy, or collects or receives a premium.

Council does not distinguish between individual life insurance agents, agencies, and MGAs. Regardless of their title or function, all licensees are subject to the same requirements set out in the legislation and further clarified in Council’s Code of Conduct. When a concern arises, Council will review the conduct of each licensee involved in the transaction. The degree to which any given licensee may be culpable for an improper transaction will depend on the extent of their role. LEGISLATION:

• Section 173(1)(c)(iii) and (iv) of the Act require all licensees to be trustworthy, competent, financially reliable, and to publicly carry on the business of insurance in good faith and in accordance with the usual practice.

• Section 177 of the Act deals with selling offences, such as the improper replacement of insurance, misrepresentation, and coercion during a life insurance solicitation.

• Section 185 of the Act makes it a requirement for a life licensee to keep proper records and books of account relating to their insurance business.

CODE OF CONDUCT:

The purpose of the Code of Conduct (the “Code”) is to define and communicate standards of conduct that can be used as a guide by licensees in their practice of the business of insurance. Council also uses the Code as a guide in its deliberations on proper and usual practice in particular circumstances.

The Code is available on Council’s website at www.insurancecouncilofbc.com. Anyone wishing to receive a copy by mail can do so by sending a written request to Council.

Examples of relevant guidelines and associated misconduct include: Good Faith

• wilful disregard of duties and obligations under the Act and Code; and, • misrepresentation or failure to disclose material information where required. Competence

• properly placing coverage as instructed;

• conducting an adequate fact find and assessment of a client’s insurance needs; • advising a client of a lapse or change in insurance coverage; and,

• proper handling and accounting of money or property held in trust. Usual Practice

• protect clients’ interests and privacy; • evaluate clients’ needs;

• disclose all material information; and,

• act with integrity, competence, and the utmost good faith.

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WHAT IS THE MGAS FUNCTION?

The meeting began with a discussion on the variety and complexity of distribution options available in the marketplace, including MGAs, Associate General Agents (“AGA”), Producer Groups (“PG”), and independent agents. The roundtable then set out to define the role of the MGA. If life insurance is viewed as a commodity, MGAs can best be described as a “wholesaler” or “middleman”, providing service to both insurers and independent life insurance agents. An MGA accomplishes this through economies of scale. Agents deal with just one entity, the MGA, to secure contracts with numerous insurance companies, rather than having to negotiate with each company directly. Because the MGAs volume is collectively greater than individual agents, commissions and overrides paid by insurers are much higher, resulting in increased compensation for both the agent and MGA. Insurers reduce the amount of administration necessary to manage their sales force by dealing with a few MGAs, rather than hundreds of agents individually, thereby reducing their expenses.

According to the roundtable participants, in most cases, independent life insurance agents working through an MGA remain contracted directly with the insurer and are the agent of record for the business. However, in some cases, the producer contract is secured by the MGA, who has been delegated authority by the insurer to act in this capacity.

While each MGA establishes its own business model regarding the services they offer to their agents and each MGAs practice can vary widely, it was generally agreed that in addition to assisting agents with contracting, other functions of the MGA typically include the following:

• reviewing life insurance applications for completeness and accuracy and forwarding them to the insurer;

• ensuring required medical information is obtained (APS, paramedical, etc.); • ensuring policy illustrations have been signed;

• assisting life insurance agents with market development; • forwarding policy documentation to the life insurance agent;

• liasing with insurers for information required by the agent, such as in force policy statements; • training new agents;

• pre-licence screening, interviewing, and selection; and,

• directing the insurer on commissions payable to the life insurance agent.

In general terms, the MGA does not assess the appropriateness of insurance solicitations carried out by the life insurance agent. It mainly acts to ensure that documentation and information required in an insurance transaction is complete and accurate and directed to the appropriate party. Protocols are usually established within an MGA to ensure that transactional information is handled in a timely manner and required underwriting requirements are met. The MGAs contract sets out the duties and responsibilities incumbent upon the MGA and the life insurance agent, such as meeting regulatory requirements and acting in accordance with the insurer’s expectations and standards.

The main benefits of working with an MGA include:

• centralized and professional administration for independent agents; • reduction in administration costs for insurers and independent agents; • greater ability for consumers to access a variety of insurance products;

• higher commissions to agents through the pooling of business in the MGA distribution model, thereby removing the incentive to place business with one particular carrier; and,

• protection of chargebacks for insurers.

Although AGAs and PGs were also identified as entities with which insurers and life insurance agents form relationships, significant discussion did not take place in this area as their roles in an insurance transaction were seen to be more limited in nature. Notwithstanding, it was acknowledged that another level in the MGA distribution model could increase the likelihood of an administrative error or a misunderstanding arising in an insurance transaction.

WHAT ARE THE RESPECTIVE ROLES OF THE INDEPENDENT AGENT AND THE MGA?

Independent Agent

It was agreed that the independent agent is responsible for the overall sales presentation and

of an agent’s recommendation given that they do not speak with the consumer directly and are rarely apprised of what was discussed. Additionally, as agents are free to deal with more than one MGA, even for the same client, an MGA would have no way of knowing a client’s needs, goals, and objectives. Accordingly, the life insurance agent is in the best position to assess what coverage is appropriate for the consumer based on their discussions.

The following summarizes some of a life insurance agents duties in a transaction:

• before conducting a transaction, undertake sufficient fact-finding and needs analysis to properly assess a client’s circumstances, goals, and objectives;

• disclose any information relevant to the client’s insurance needs that a reasonable and prudent licensee would disclose in the same circumstances;

• disclose to the client any arrangements to place the client’s insurance through another agent; • fully inform clients about all aspects of the insurance products they purchase, including any

changes that occur during the term of the policy;

• do not use sales materials or illustrations that are misleading or unnecessarily confusing; • maintain proper records of clients’ insurance matters and provide for the safekeeping and

confidentiality of those records;

• deliver insurance policies or evidence of insurance coverage within a reasonable time as required;

• fully and accurately disclose any information material to the insurer’s decision to issue a contract of insurance; and,

• fully and accurately complete and/or provide required documentation including the application, illustrations, summary information folders, section 90 disclosure forms, and/or Basic

Disclosure Statements for replacement (if applicable). MGA

Agents are the front line contact with clients and MGAs tend to be the front line contact with insurers. Some insurers prefer not to deal with independent agents directly and require all requests be handled by the MGA. Accordingly, the MGAs primary responsibilities relate to the proper and timely handling of applications and other related matters.

The following summarizes some of an MGAs duties in a transaction:

• review applications for insurance to ensure they are complete and accurate;

• ensure required illustrations and other documents required by the underwriter are complete and signed by the client if applicable;

• adhere to the underwriter’s instructions or guidelines for handling incomplete documentation; • identify and arrange to obtain required medical or other information as set out by the

underwriter;

• maintain proper records of clients’ insurance matters and provide for the safekeeping and confidentiality of those records;

• forward insurance policies or other relevant documentation to the agent for delivery to the client within a reasonable time as required;

• fully and accurately disclose any information that is material to the insurer’s decision to issue a contract of insurance;

• ensure that requests for information from agents are addressed in a timely and reasonable manner; and,

• ensure that information communicated to insurers and agents is accurate. CONCLUSION

While the role of a life insurance agent and MGA can vary depending on the nature of the transaction and contractual relationship, both share responsibility to ensure all aspects of the transaction are

conducted properly. The primary consideration is that the relationship between the life insurance agent and MGA should not result in prejudice to a client. Life insurance agents and MGAs need to clearly articulate the duties and obligations of each party at the outset of their contractual relationship. Generally, the roundtable participants did not identify any significant issues of concern with the MGA distribution model. The model was viewed as an effective means to facilitate the placement of

coverage on behalf of consumers as well as providing administration, commission, and premium benefits to life insurance agents and insurers. While it was acknowledged that errors and

misunderstandings can occur at any level of the transaction by any of the parties involved (insurer, MGA, or agent), the involvement of MGAs was not seen as increasing the level of risk to a consumer. In fact, it was argued that by providing professional administrative support to agents and reducing their administrative burden, fewer mistakes may result thereby mitigating risk to the consumer. It was noted that it can be difficult for independent agents working on their own to manage and follow up on

numerous pending applications, outstanding requirements, policy issuance, and so forth.

It was also mentioned that most MGAs have implemented technologies which provide additional reliability and efficiencies. One MGA present in the discussion indicated they have real time access to an insurer’s system which enables them to determine the current status of a pending application. Ultimately, the roundtable participants did not believe it necessary to impose additional responsibilities on life insurance agents or MGAs due to their participation in the MGA distribution model. Concerns that do arise can be dealt with on a case by case basis through existing requirements set out under the Act and accompanying regulations, both of which are clarified in Council’s Code of Conduct.