Canada: British Columbia To Life Insurers: "Take Control Of Your Life ... Distribution"

On June 13, 2013, the Financial Institutions Commission of British Columbia ("FICOM") issued for comment its draft Managing General Agents (MGAs) Guideline ("Draft Guideline"). The Draft Guideline outlines FICOM's expectations of best practices for life insurers to adopt when using managing general agents ("MGAs") to distribute individual life insurance products in British Columbia. The Draft Guideline incorporates the recommendations set out by the Canadian Council of Insurance Regulators in its November 2012 position paper entitled Strengthening the Life MGA Distribution Channel. (Click here to access the Draft Guideline.)

While the use of MGAs may satisfy life insurers' need to have the flexibility to configure their distribution operations in the most appropriate way to achieve their corporate objectives, FICOM states that such arrangements may increase the insurers' risk profile if they are not properly managed or controlled.

To better manage their risk profile, FICOM expects life insurers to have an appropriate strategy in place for any business conducted through an MGA. FICOM expects this strategy to incorporate the following best practices:

1. Selection of the MGA – Life insurers must conduct appropriate due diligence on any MGA with whom they intend to do business.

2. Oversight – Life insurers must maintain effective systems and controls over the services provided by the MGA.

3. Selection, Screening, and Monitoring Agents – Life insurers must have effective processes to ensure that all insurance agents, including independent agents, who distribute their products have been screened for suitability and are subject to ongoing monitoring for suitability.

4. Reporting Unsuitable Agents – Life insurers must immediately report to the appropriate regulatory authority any agent who is believed to be unsuitable.

To assist in the implementation of the best practices, FICOM has developed six core principles. These six core principles are summarized below. 

Principle #1: 

A life insurer must have a clear strategy for selecting, appointing, and managing an MGA as part of its overall distribution plan. This strategy should be applied consistently across all MGA arrangements and needs to be reviewed and updated regularly.

Principle #2:

A life insurer must carry out thorough due diligence of each MGA prior to entering into the arrangement to provide services.

Principle #3:

A life insurer must have an effective written agreement in place with each MGA. This agreement must define clearly the conditions, scope, and limits of contracted services. This agreement should be reviewed and, if necessary, updated at least annually.

Principle #4:

A life insurer must proactively manage the MGA relationship once its arrangement with an MGA is in place, including managing compliance with the contractual conditions of the agreement discussed at Principle #3. Insurers are expected to address all issues relevant to managing the risks associated with the use of MGAs to the extent feasible and reasonable, given the circumstances and having regard to the interests of the policyholders.

Principle #5:

A life insurer must ensure that any agent distributing its products in British Columbia has been screened for suitability and is subject to ongoing monitoring for suitability.

Principle #6:

 All regulated parties are responsible to report misconduct; however, the insurer and the MGA do not need to report the same incident. The obligation to report misconduct to the insurer should be set out in the MGA-insurer agreement and the obligation for the insurer to report to the regulator is to be respected at all times.

FICOM acknowledges that the ways in which life insurers meet these six principles may vary, depending on the specific arrangements and relationships with different MGAs.

The Draft Guideline also includes standards, which set out specific policies and procedures that underpin the six core principles. These standards are set at a level that FICOM expects can be adopted and substantially implemented by every life insurer.  

Comments on the Draft Guideline should be sent to Harry James, Director, Policy Initiatives at insurance@ficombc.ca by July 26, 2013.

COMMENTARY

In its final form, the Draft Guideline will impose upon life insurers a higher degree of responsibility when it comes to the selection, oversight, and control of the MGAs through which their individual life insurance products are sold. Life insurers will be required to take a more active role in identifying suitable MGAs and monitoring these relationships to ensure continuous compliance with the final form of the Draft Guideline. In practical terms, life insurers will be required to devote more energy and resources to developing and maintaining policies and control systems to ensure compliance.

Ontario already requires that insurers have in place a compliance system to screen agents for suitability and report unsuitable agents. To comply with this requirement, insurers have used as a guide the Canadian Life and Health Insurance Association's Guideline G8: Screening Agents for Suitability and Reporting Unsuitable Agents ("CLHIA Guideline"); however, some life insurers' compliance systems based on the CLHIA Guideline for use in Ontario may not be robust enough to comply fully with the Draft Guideline. For instance, where the CLHIA Guideline simply lists situations that would make an MGA unsuitable, the Draft Guideline provides a more robust list of due diligence considerations. In addition, where the CLHIA Guideline is largely silent on the required contents of an insurer's agreement with an MGA, the Draft Guideline provides a detailed list of what should be included in such agreements. Also, the Draft Guideline includes greater detail as to the elements that should be included in the ongoing monitoring process of an MGA.

The degree of onus placed upon life insurers as proposed by the Draft Guideline is similar to the onus placed upon federally regulated entities under the Office of the Superintendent of Financial Institutions Canada's Guideline B10: Outsourcing of Business Activities, Functions and Processes ("OSFI Guideline") in respect of certain outsourced functions. Whereas the outsourcing to agents and brokers of the sale of individual life insurance policies is exempt from OSFI Guideline, federally regulated life insurers will have to comply with the final form of the Draft Guideline in respect of these arrangements in British Columbia.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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