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Walt Sturhahn holds a picture of his late mother, Katie Sturhahn, at his home in Vancouver. (John Lehmann/The Globe and Mail/John Lehmann/The Globe and Mail)
Walt Sturhahn holds a picture of his late mother, Katie Sturhahn, at his home in Vancouver. (John Lehmann/The Globe and Mail/John Lehmann/The Globe and Mail)

Through Canada's insurance loophole Add to ...

"I was trying to develop an agency like my successful father," she said in an e-mail denying the allegations. "I've been in business 23 years, never had a complaint against me."

But the trust that consumers place in the life insurance industry reaches beyond the independent agent they deal with. Canadians assume that regulators are also keeping an eye on those agents, and that insurers have a stake in overseeing the way their products are sold.

Canada is known for its financial regulation, and when it comes to insurance, Ottawa watches over the capital structures of underwriters, while provincial watchdogs are responsible for policing how policies are sold.

Traditionally, life insurers assumed responsibility for the agents who sold their products and gave advice to clients. The market was dominated by insurers' in-house career sales agents, whom they recruited and were responsible for training and supervising. While oversight of agents was not embodied in law, it was enshrined in corporate practice because the insurers knew their brands were at stake if customers had problems with their agents.

The directness of the chain of responsibility from insurer to agent is clear from the industry jargon for these agents: "captives."

"Everyone worked for a company," says Kevin Cott, president of a Toronto-based MGA, Qualified Financial Services, who joined the insurance business in the early 1980s. "Advisers, training, financials, paying of commissions, monitoring, mentoring - the whole nine yards - were the responsibility of the insurer."

The life insurance industry began undergoing a low-profile but massive transformation two decades ago as the independent agent distribution model, sometimes called the broker channel, started taking hold.

The channel flourished because it helped consumers shop around without having to visit an agent at each insurer. But insurers were also enthusiastic as they realized that using independent agents would be easier and cheaper than employing a captive sales force.

Insurers generally tried to do some homework on agents before signing contracts with them, and still had a vested interest in ensuring that their advice to customers and sales tactics were up to snuff.

But as the independent sales channel grew, a problem emerged that would ultimately lead to the creation of MGAs.

To learn the ins and outs of complicated products, independent brokers were forced to deal with multiple insurers. And the insurance companies had to spend time dealing with legions of independent agents to keep them up to date. This proved unwieldy. Hence, the new corporate middlemen that evolved to fill this need.

Some MGAs were started by former career agents who saw an opportunity and wanted to branch out on their own. In some cases, career agents were pushed by the insurers themselves to start up a shop.

As the insurers wound down their own internal agent systems, Mr. Cott says, "they would often tell managers, 'Listen, we're closing down your office, but what we'll do is we'll give you a direct contract, an MGA contract if you will, for you and your people.'"

The shift to outsourcing is reflected in the career agent population, which is tracked by the Canadian Life and Health Insurance Association.

The numbers show a steady decline since 1985, when there were 22,600 career agents. For the past decade, the number has been below 10,000.

Meanwhile, the number of independent agents selling life insurance has soared to 76,300. A large but unknown number of those are now working through MGAs.

The role of career agents has dwindled to the point that they represent less than one-third of the industry's sales. The bulk of sales come from independent agents, and much of that is done through MGAs.

Only a handful of life insurers, including London Life Insurance Co. and Industrial Alliance Insurance and Financial Services Inc., are still recruiting and using career agents. Sun Life has the biggest stable, with more than 3,500 people across Canada. Manulife Financial, the largest Canadian-based life insurer, conducts more business through MGAs than any other underwriter.

"Over the last several years, we've had a strategy to significantly grow our presence in the MGA channel, and that has been driving most our growth in the life insurance business," Paul Rooney, the head of Manulife's Canadian operations, told analysts in late November.

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