Canada's top insurance regulators, pointing to significant problems with oversight in the life insurance industry, are working to fix a loophole that has left billions of dollars of policies without standardized rules to protect consumers.
The Canadian Council of Insurance Regulators (CCIR) is investigating the proliferation of a new breed of insurance wholesaler known as Managing General Agents, which has sprung up outside of traditional industry regulations. These companies, which operate as middlemen between large insurance companies and independent agents and brokers, have flourished over the past decade and now account for more than a third of all policies sold in Canada.
A new report from the CCIR highlights a lack of oversight of these MGAs, with an eye to revamping the regulations. In particular, the regulators are investigating the offloading of responsibility for how insurance products are sold and how agents conduct themselves. As insurers look to save costs, these roles are increasingly being filled by the middlemen wholesalers.
However, regulators are coming to terms with the fact that they have little recourse against these companies if there are problems. The rise of MGAs "may have created a number of risks to consumers and gaps in regulatory regimes," says the report.
The report comes after a Globe and Mail investigation in December detailed serious problems that have emerged as MGAs began to proliferate in the 1990s, beyond the watch of regulators and without most consumers knowing they exist. The industry has evolved so quickly that regulations have not kept up with the changes, the Globe report found.
In cases where consumers have been sold inappropriate insurance products or given bad advice that has ended up costing them large sums of money, the existence of MGAs has made it difficult for regulators to clamp down, or even determine who should be responsible for the independent agent.
Insurers traditionally oversaw the actions of their in-house life insurance agents. But as the industry shifted toward using an independent sales force such as a broker or agent who would sell several companies' products, insurance companies have grown more removed from the consumers who buy their products. Instead, MGAs stockpile policies and supply them to agents. However, the MGAs, which operate under no standardized rules, argue they are not responsible for how those products are sold.
The report asks: "Who is watching MGAs?" and raises concerns that there may be "no clear lines of accountability." It has implications for the sector, since the Canadian Council of Insurance Regulators can set rules for companies across the country.
"Currently there is no jurisdiction with specific legislation governing the functions that an MGA performs," the report says.
The report estimates at least one-third of Canadian life insurance policies are now transacted through this channel, which amounts to tens of billions of dollars worth of coverage sold in a regulatory grey area with no standardized rules.
A recent case in Montreal highlights the problems regulators are concerned about. Two siblings who were sold a segregated fund on the advice of their independent agent were told any gains made on the investment would be taxed as capital gains, rather than regular interest, which is taxed at a much higher rate. However, when the tax bill came, it was more than $400,000 higher that what it should have been, because the agent was wrong. A lack of training for the agent and understanding of the product is alleged to be the problem.
When regulators approached the insurance company, it said the product was sold through an MGA, and the MGA should be responsible for the agent's actions and training. But the regulator has little recourse over the MGA to ensure certain standards are maintained. The case is now making its way through Quebec courts. Regulations are being contemplated that would hold MGAs or the insurance companies responsible - closing the oversight loophole.
"No amount of supervision can prevent incidents of inappropriate advice by a representative. However, it is possible, in the course of monitoring the activities of a representative, for an insurer to come across information that clearly demonstrates that the representative may not have the appropriate skills and knowledge to sell insurance products," the report says.
Because there is no standard regulation of MGAs, regulators aren't sure how big the sector has become. "We know neither the exact number of entities with MGA contracts nor the size or scope of their operations," the report says. It is believed there are between 300 and 400 of them operating in Canada.