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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 ...

Manulife and many other major insurers declined to be interviewed on the record about the MGA issue. Some insurance executives said that criticizing the distribution channel would be detrimental to their business.

Insurers benefit by relying more on MGAs. One example: A large proportion of life insurance commissions are paid up front, when the policies are sold. If the consumer later abandons that policy, the insurer will "charge back" the unearned commission. Under the old model, the insurer had to track down agents years after the policy was sold to get its money back. Now, MGAs get hit with the chargebacks.

But perhaps the most fundamental advantage of the MGA route is that it saves insurers the costs of recruiting and training agents. These expenses are harder to justify now that it's easy to effectively "rent" distribution, says a senior executive of one Canadian life insurer, who adds, "We love the MGA channel."

Why this became a problem

No one envisioned that an entire segment of the insurance industry would spring up unregulated - it just seemed to happen.

In the old system, before MGAs evolved, it was in the best interest of insurers to keep close relationships with their agents.

This made it easier to drive sales higher, since it exposed weaknesses in sales performance, but it also helped to spot problems. An agent with excessively high sales might be needlessly selling customers too much coverage in order to boost commissions. In such cases, a company risked losing that customer.

But the disconnect under the MGA system has created several loopholes which have direct implications for consumers should problems arise. When approached by the regulators, the insurance companies who underwrite the policies can argue that they have no knowledge of the agent's actions, and that responsibility rests with the managing general agent. The MGA, on the other hand, can deflect responsibility by suggesting that its role is not to police the sales of policies, since it is merely a middleman stocking products from the large insurers for the independent agents to sell on the street.

The industry is now a patchwork of sales practices without any standard procedures. The way MGAs oversee agents' activities varies from firm to firm. Some insurers write conditions into their contracts with MGAs specifying they must police agents, but many do not. Some insurers' contracts require that MGAs screen the agents that they hire; others don't.

"From one MGA to another, there is a different level [of supervision]and different standard at play," says Terri Di Florio, the chief executive officer of Hub Financial Inc., one of the country's largest MGAs, supplying 3,000 independent agents across the country.

That means the consumer can have no expectation of a safeguard when they buy a life insurance policy that is channelled through an MGA - and the consumer is unlikely to know that an MGA is even involved.

The sales practices of agents working for MGAs are not the only worry. The vast amounts of personal and medical information consumers provide to their agents also sit outside the rules.

"One of the big issues is privacy," said one insurance executive. "They have underwriting files from brokers that sit in their file drawers. There's no regulation and they've got medical information on people and it's just sitting there. … I really don't think the consumer has any idea about what happens to their information once they give it in this channel."

To further cloud the picture, it's not even clear who the agent answers to. Some agents will work with more than one MGA, making it harder to determine who is responsible for any given agent.

One more wrinkle is the appearance of a new category of players, generically known as associate general agents, or AGAs. Those are agencies that don't have enough sales volume to get an MGA contract. "They have this middle ground between a brokerage contract and an MGA, and so you might be an AGA of an MGA," says an executive at a major insurer who spoke only on condition of anonymity. "So that's yet another layer. And that gets even further from the regulatory environment."

The rules are so lax that even when a regulator confronts a problem agent, it's all too easy for the agent to simply find another MGA. Earlier this year, Mr. Matier of the Insurance Council of British Columbia revoked the licence of an agent he was investigating. That didn't put the broker out of action. The agent simply found an MGA in another province - Saskatchewan - that would provide a contract, so that the agent could keep on selling policies in Canada.

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