On September 28, 2022, the Financial Services Regulatory Authority of Ontario (FSRA) announced its planned actions following a Joint Review of life and health managing general agencies (MGAs) with the Canadian Council of Insurance Regulators (CCIR).
In particular, FSRA has indicated that it will develop an expanded supervisory plan and initiate a review of selected insurers that are contracted with the three MGAs (whose identities were not revealed by FSRA) that were the subject of the Joint Review. FSRA also plans to release draft interpretation Guidance for public consultation in the fall of 2022 and a proposed Rule to enhance the MGA regulatory framework for public consultation in 2023.
FSRA conducted the Joint Review of three life and health MGAs to identify potential market conduct and consumer risks, finding that the MGAs used a “tiered-recruitment” business model and lacked mechanisms to ensure the fair treatment of customers. Such models are often referred to as multi-level marketing, network marketing or recruitment-focused models. FSRA has acknowledged that this business model is not standard for life and health MGAs in Ontario.
Areas of concern
FSRA’s primary concerns were as follows:
1. Agents were compensated based on their insurance sales in addition to insurance sales made by the people the agents recruited. FSRA noted that life and health agents (Agents) are heavily incentivized to recruit and expand business while simultaneously being responsible for supervising their “downline” Agents. However, the MGAs did not likely have the necessary resources to supervise their Agents in proportion to such rapid growth, many of whom would be inexperienced and require supervision for at least two years.
2. Agent training lacked important substance, rigour and reporting mechanisms to ensure agents understood and were able to serve customer needs. Agents are expected to provide consumers with information that sufficiently explains the insurance product characteristics and how it meets their needs. Agents are expected to avoid unethical behaviour, including failing to disclose conflicts of interest or providing false or misleading information about an insurance product.
FSRA notes that if training is delegated by insurers to MGAs, there should be clear roles and responsibilities between the insurers and the MGAs. If that function is further delegated to other parties by MGAs, the parties should clearly set out their expectations.
3. Agents sold relatively complex products without adequate oversight to ensure product suitability and fair treatment of customers. FSRA determined that a significant amount of business written by newly recruited and licensed Agents of the MGAs reviewed included permanent life insurance products, which are relatively more complex than term life insurance products. Although permanent life insurance products may be beneficial and appropriate for certain customers, the distributing Agent must understand the product and provide the customer with appropriate information and risk analysis to make an informed decision. In FSRA’s view, there is a likelihood that inexperienced or newly licensed Agents who are not adequately supervised will not be in a position to provide the customer with sufficient information or advice to make a fully informed decision.
4. Insurers and MGAs performed minimal formal and proactive supervision to ensure fair treatment of customers. The insurers delegated Agent screening, training, monitoring and supervision to the MGAs. In addition, FSRA’s review noted concerns with Agent training and monitoring, where MGAs further delegated elements of such functions to their Agents. FSRA notes that insurers have an obligation to establish and maintain a system that is reasonably designed to ensure that each Agent acting on their behalf complies with the Insurance Act (Ontario), its regulations, and the Agent’s obligations under its insurance licence, regardless of whether or not oversight functions have been delegated. Insurers ultimately retain the regulatory responsibility to ensure their Agents are adequately trained and monitored, and consumers are treated fairly.
The findings discussed above align with FSRA’s July 2021 report, which reviewed, among other items, life insurers’ supervision of life and health MGAs operating in Ontario (2021 Review). The 2021 Review found that each reviewed insurer had standardized agreements across most of its MGAs, as well as a range of supplementary documents, such as commission schedules and codes of conduct. In addition, FSRA found no formal rationale for the selection by insurers of what functions to delegate to any given MGA. FSRA also noted that most reviewed insurers delegated similar Agent-related functions to all of its MGAs, regardless of the MGAs’ varying size, complexity, and resources. FSRA noted that such actions by insurers reflect a lack of strategy, not only during the MGA screening and onboarding processes, but also when insurers delegate functions to MGAs.
The involvement of MGAs in life and health insurance distribution can be beneficial for both insurers and consumers. However, the very nature of an MGA arrangement involves delegating certain oversight functions to MGAs. Where oversight and supervisory functions and powers are not performed effectively by the insurers, consumers are vulnerable to receiving improper advice regarding product suitability and affordability from the Agents involved in the distribution of insurance.
FSRA has committed to improving its agent oversight capacity and continuing its risk-based supervision of the end-to-end distribution of insurance products in Ontario. Although life and health MGAs are not typically structured as recruitment-focused business models, such a model may pose challenges and risks regarding Agent oversight and supervision.
Regardless of the MGA business model, insurers and MGAs should ensure that each party’s roles and responsibilities are clearly and specifically outlined in writing and that agents complete enhanced compliance training, particularly where complex insurance products are sold. Insurers should also engage in proactive and ongoing oversight and monitoring of MGAs and independent agents. We recommend that policies and procedures be documented in writing. Moreover, insurers and MGAs should conduct annual audits, in addition to random spot audits, of their Agents’ activities to ensure that customers are being treated fairly. In addition, the MGA’s sales process should include controls, which are routinely tested, to ensure compliance with the CCIR-CISRO Guidance: Conduct of Insurance Business and Fair Treatment of Customers adopted on September 27, 2018. With proper documented policies and procedures, training, and annual audits of their MGAs and Agents, an insurer can establish proper oversight and control to ensure that needs assessments are being conducted by their Agents that adequately reviews the consumer’s needs and product suitability prior to the sale of the product.
Please do not hesitate to contact a member of the Dentons Canada Insurance Regulatory team with any questions.