Lynne Rae Zlotnik had insurance in her blood.
Her father, Harold, began selling policies in 1945 and eventually she followed in his footsteps. "Insurance," Harold Zlotnik liked to say, "is the business of financing dreams."
But when insurance regulators began looking into Vancouver-based Lynne Zlotnik Wealth Management Inc. this year - a firm she created in 2006 to sell life insurance and other investment products - they were troubled by what they found.
Several of her clients had invested a total of more than $1.4-million in her company on the promise of a lucrative return. The clients included 96-year-old Katie Sturhahn, who cashed out a $200,000 segregated fund, an investment fund that comes with insurance guarantees, and instead put her faith in the insurance agent.
It was a questionable financial strategy, since the payout on the fund - which she intended to leave her five children - was assured. Soon after the elderly woman died in March, the agent declared bankruptcy, and the money was gone.
"That was our inheritance," says her son, 71-year-old Walt Sturhahn. "We've got none of it."
But an even more disturbing discovery had yet to be made: When regulators went looking for someone responsible for overseeing such a risky financial transaction, there was no one to answer for it. The regular checks and balances that are designed to oversee an insurance agent had failed.
The insurance company that administered the policy had no direct oversight over Ms. Zlotnik. In a practice that is increasingly common throughout the industry, she dealt with a middleman company called a Managing General Agent, or MGA, which is an unregulated wholesaler of insurance products to independent agents that few consumers know about. That made it difficult for regulators to scrutinize her conduct.
The case exemplifies a problem that's emerged as the insurance industry becomes increasingly complex. As the sale of life insurance has evolved over the past decade - designed to sell more policies and maximize profits for insurers and agents in an already-mature market - it has also placed consumers at risk.
A Globe and Mail investigation has uncovered a gaping hole in Canadian insurance regulation: Cases like the Sturhahns' are not isolated events. Instead, nearly half of all individual life insurance policies in Canada are now being transacted through MGAs, which often undertake little - if any - oversight of agents in the market.
Though consumers place trust in their agents and increasingly look to them for financial advice and to explain complex policies and products, insurance regulation hasn't kept pace with the industry, and doesn't take these wholesalers into account. Across the country, MGAs operate beyond the watch of regulators - leaving consumers exposed.
Though regulators can revoke an agent's licence - Ms. Zlotnik lost hers in April - by that time it's too late for the consumer. The damage can't be undone and the money may be unrecoverable. With closer oversight, the sudden cancellation of insurance policies such as Ms. Sturhahn's or decisions resulting from poor financial advice would be detected earlier, when the moves could still be reversed in the consumer's favour if questionable circumstances were found.
"[My brother]said 'Just forget it, forget it,' " said Mr. Sturhahn, who is wheelchair-bound and suffers from asbestosis after a career as a carpenter. "And I'm trying, but it's hard to forget when you're living on a shoestring and something like that happens."
When Gerald Matier, executive director of the Insurance Council of British Columbia, which licenses agents in the province, looked into the matter, he was stunned: Since Ms. Zlotnik was working through an MGA, no one was directly responsible for overseeing the agent.
When he asked the MGA whether anyone thought to question the cashing in of an insurance product by a 96-year-old woman, he learned that no one had, because there are no regulatory requirements for MGAs to police life insurance agents.
It was a problem that no one, not even regulators like Mr. Matier, saw coming.
Twenty-five years ago, most insurance agents were contracted directly by the insurance companies whose policies they sold. Agents were in-house representatives of firms such as Manulife or Sun Life and employers were responsible for keeping tabs on their sales forces.