CLHIA comments to FICOM re: MGA GuidelineRelease Date: 07/18/2013 Staff Reference: Peter Goldthorpe
July 18, 2013
Director, Policy Initiative
BC Financial Institutions Commission
Suite 2800, Box 12116
Vancouver, BC V6B 4N6
Dear Mr. James:
The Canadian Life and Health Insurance Association (CLHIA) is pleased to provide comments on the draft guideline, Use of Managing General Agents (MGAs).
Established in 1894, CLHIA is a voluntary trade association that represents the collective interests of its member life and health insurers which, together, account for 99% of the life and health insurance in force in Canada. Our members contribute to the financial well-being of millions of Canadians by providing a wide range of financial security products, including over $3.8 trillion of life insurance coverage. During 2011 in British Columbia, life and health insurers made benefit payments of $7.1 billion, or roughly $136 million a week, to policyholders and beneficiaries.
For the last several years, the Canadian Council of Insurance Regulators (CCIR) has been studying how life insurers operate in the MGA channel. This examination culminated in its 2012 Position Paper, Strengthening the Life MGA Distribution Channel. CLHIA worked closely with CCIR on this project, participating in roundtable discussions, preparing written descriptions of industry practices and responding to formal consultations.
At the same time, CLHIA began preparing a series of documents explaining how general industry practices can be adapted to the MGA channel. This work began with the release in 2011 of the Standardized MGA Compliance Review Survey (CRS), a survey that insurers can use to assess how effectively MGAs are carrying out compliance related functions. The CCIR Position Paper called on "…industry stakeholders to develop industry standards so that all market participants know what is expected of them." To this end and with the advice in the Position Paper, CLHIA has continued in its efforts to provide the desired clarity.
For these reasons, we question the need for and certainly the timing of FICOM's draft guideline. To the extent that the FICOM draft guideline is consistent with the recommendations in the CCIR Position Paper and given the value in promoting harmonized approaches, it would seem more prudent to first assess the merits of the industry standards requested by CCIR. FICOM will have an opportunity, through CCIR, to comment on CLHIA's proposals. The end of that process, which we expect will be completed this year or early next, would seem a more prudent and reasonable time to assess the need for further guidance.
In these comments, we will briefly explain how CLHIA's work contemplates, and at times goes beyond, the guidance in FICOM's draft guideline. We will also draw attention to specific details in the draft guideline that may require additional clarification.
The foundation for CLHIA's approach to the MGA channel is set out in CLHIA Guideline G8 Screening Agents for Suitability and Reporting Unsuitable Agents. Among other things, this guideline clarifies that, in situations where an insurer relies on an MGA to carry out compliance related functions (such as screening agents for suitability), the insurer remains responsible for ensuring the MGA can and does carry out the functions. Guideline G8 provided the basis for the CRS. The CRS provides insurers with a means to carry out effective and detailed oversight of MGAs (i.e., Principle #4 in the draft guideline).
Guideline G8 also provides detailed advice to help insurers identify unacceptable market conduct (Principle #5) and report unsuitable agents to regulators (Principle #6). On this point, it should be noted that the draft guideline does not distinguish between MGAs reporting to insurers and insurers reporting to regulators. As a result, it appears to set a threshold for reporting that could result in overburdening regulators with concerns that are most appropriately dealt with through training, monitoring or other means of remediation.
The CRS can also be used by insurers as part of their initial due diligence when deciding whether to enter into a contract with an MGA (Principle #2). But the scope of effective due diligence extends beyond the MGA's abilities to carry out compliance functions. With this in mind, and using the guidance provided by the CCIR Position Paper, CLHIA is developing more comprehensive advice in this area.
The balance of these comments identifies a few points in the draft guideline that require clarification.
The five risk factors, which are also set out in the CCIR Position Paper, are a restatement of the test for materiality established in the Office of the Superintendent of Financial Institutions (OSFI) Guideline B-10, Outsourcing of Business Activities, Functions and Processes. The expectation of OSFI is that management will develop outsourcing policies and the board will approve them. Accordingly, these roles and responsibilities of management and the board should be reflected in the draft guideline to more accurately describe accepted corporate governance practices. More specifically, the board approves high-level distribution policies and senior management develops and approves more detailed policies, including those specific to a distribution channel.
Further, as was explained by CLHIA in the June 2010 report to CCIR describing how insurers operate in the MGA channel, an assessment of materiality based on the five factors will generally conclude that the arrangement is not material. The first factor addresses finances and reputation. MGAs have limited control over premiums and any charge backs owing to the insurer are likely to be a small portion of the insurer's revenues. The second factor addresses internal controls. There is considerable redundancy in compliance monitoring with the result that insurers seldom rely exclusively on the controls of an individual MGA. The third factor addresses cost. As the MGA's income is derived from commissions paid to their advisors, there are no specific costs related to the arrangement. The fourth factor addresses the availability of alternatives. The facts that insurers typically have arrangements with a number of MGAs and many also distribute through other channels mean the impact of an individual MGA's failure is minimal. The fifth factor addresses multiple arrangements. The fact that MGAs have relationships with several insurers does not introduce any risk that is not already inherent in a competitive marketplace.
Based on these five factors, the risks associated with an arrangement between an insurer and an MGA are not likely to be material. What is more, the risks associated more generally with the channel are well understood and there are established industry practices for effectively managing these risks. For these reasons, the strategies that insurers adopt in relation to MGAs are relatively straightforward and will not need to be updated on a regular basis.
Principle #3 states that there should be a written agreement that clearly describes the contracted services. It goes on to say the agreement should be reviewed and, if necessary, updated at least annually.
The suggestion in the draft guideline that these agreements should be reviewed annually is unduly burdensome and does not allow for proportionality. As is the case with many business relationships, these agreements are negotiated in good faith with the expectation that both parties will honour the conditions for an extended period of time. If FICOM is concerned that industry practices and regulatory requirements are evolving in ways that may need to be reflected in updated agreements, this can be addressed without resorting to opening up the actual agreement. As was explained by CLHIA in its June 2012 response to the CCIR May 2012 Position Paper, a common industry practice is to incorporate industry standards by reference in the contract. CLHIA's response contained a couple of examples of appropriate contract language and explained that this approach has the advantage of facilitating "quicker and more wide-spread adoption of evolving practices."
In summary, the FICOM draft guideline closely parallels the CCIR September 2012 Position Paper and thus reflects a number of industry initiatives that are underway. On a couple of key points, the draft guideline makes recommendations that could represent significant departures from sound industry practices that generally allow for consideration of materiality. These relate to the roles and responsibilities of the board and the nature of written agreements between insurers and MGAs.
We would be pleased to discuss the CLHIA initiatives and any of the matters raised in these comments in more detail if that would be helpful.
(Original Signed by)