Distribution through agents/representatives

InsuranceAbout the Canadian Council of Insurance Regulators

If you are considering buying insurance you should start the right way and this mean knowing who you are dealing with. This should be easy but it is not. This is because of the lack of uniformity across the laws enacted by the different provinces. The business of insurance falls under provincial jurisdiction and this creates many legal challenges in defining who can sell insurance. This has resulted in many misrepresentations as to the duty that an agent owes you versus the duty owed to the insurer.

An agent cannot act independantly from its principal. The insurance industry in Canada is built upon the principle of agency. Independance in the insurance industry is basically only the manifestation of limited authority conferred by the insurer to the agent. This limited authority has allowed the agent to evolve into an independant contractor where he is responsible to run and develop his own business. However this independance cannot be used as a presumption against the rule of agency.

On Financial Planning

Richard Proteau

You can buy insurance through an intermediary and this intermediary is required to hold a license in order to solicit, take a life application and offer insurance advice. The intermediary called representative or agent can be contracted with the insurer in four different ways. The agent can be contracted through another intermediary named Managing General Agent (MGA), a Direct Contract with the insurer, a Captive Contract with the insurer and Intercorporate Contract with the insurer.

Autonomous agents don't like to call themselves agents. They prefer to use terms such as independant insurance brokers, independant insurance advisors...but this is all fluff... An agent will always remain an agent no matter how many insurers he represents.

For most provinces, an agent can only represent one insurance company which is the sponsoring company if he is starting out or multiple insurance companies after a certain number of years (autonomous agent). The autonomous agent could decide to sign an agent contract directly with each different insurer he selected if these insurers allow this form of contracting. The autonomous agent could also decide to access different insurers by contracting through an intermediary called MGA.

An agent is non-autonomous if he has decided to enter into a contractual arrangement with a primary insurer called sponsoring insurer, committing to put business with this primary insurer only. This agent is called a captive agent or non-autonomous agent. The primary insurer for the captive agent may allow him to deal with other secondary insurers. In most cases, captive agents have that right when the primary insurer has signed intercorporate arrangements with other insurers or when the primary insurer creates its own MGA solely for its own captive agents. As a result it is false to state that captive agents can't deal with a MGA to sell the products of another company.

Autonomous or Captive Agents Contracted Through an MGA


In insurance, a managing general agent is defined legally as "a business entity appointed by an insurer to solicit applications from agents for insurance contracts or to negotiate insurance contracts on behalf of an insurer and, if authorized to do so by an insurer, to effectuate and countersign insurance contracts". An MGA holds at least one direct agency contract with a life insurance company registered to do business in Canada where the MGA has the contractual right to contract a licensed representative by annexing the agent/representative contract to the MGA contract. The MGA becomes a conduit that facilitates business between the representatives, their clients, and insurers and is responsible in providing some or all of the following services:

Who owns your business, the MGA or the agent? The Lafond Case Study...

  1. Supporting and assisting a representative in obtaining contracts with insurers, which can include granting authority to a representative to act on behalf of an insurer,
  2. Tracking the representatives’ business submitted by a representative,
  3. Providing representatives with direct sales support,
  4. Facilitating the two way flow of information between the insurer and the representative,
  5. Pooling of commission payments for the representative from various insurers,
  6. Facilitating the submission of completed contracting requirements between a representative and an insurer,
  7. Training representatives,
  8. Providing service to policy owners,
  9. Providing market conduct compliance support to insurers, and, in some cases,
  10. Developing products and/or assisting in the adjusting of claims on behalf of an insurer.

As a consumer, what do you need to know about the MGA Channel?

1. In most provinces, MGAs are not legally defined or recognized by the Insurance Act of each province.This is what it means:

In Alberta, the Insurance Act states that an agency contract: means a contract between an insurance agent and an insurer in which the insurance agent agrees to act as an insurance agent in respect of insurance issued by the insurer. It is further stated that an agent is: agent means a person who, for compensation, solicits insurance…

We see above that an agency contract for insurance can only occur directly between agent and insurer. Since an agent has to be a person and the term person is not defined under the Insurance Act, it is unknown if the person could be a firm. If the general usage definition of a person is used, an agency contract could not legally exist between insurer and MGA. So truly what we have is a legal void where insurers are delegating their responsibilities and authority over an agent to a third party not recognized under the Insurance Act.

In Manitoba, the insurance Act of this province defined what is a person: means a person engaged in the business of insurance and includes any individual, corporation, association, partnership, reciprocal or inter-insurance exchange, member of the society known as Lloyds, fraternal society, agent, broker and adjuster; (« personne »).

However this definition only applies to section 113 of the Insurance Act which deals with unfair or deceptive act or practices. This clearly establishes that the general definition of a person applies to the other provisions to the Act. This means an MGA cannot be an agent of the insurer. This legal void is not a maybe; it is a certainty.

All of the other province except Newfoundand and Quebec, are in the same position as Alberta.

Newfoundland is very different. In the Insurance Act of Newfoundland it is clearly stated that an agent is a corporation: agent means agent as defined by the Insurance Adjusters, Agents and Brokers Act; agent means a corporation or partnership which, for compensation, solicits insurance on behalf of an insurer .

It is clear that the MGA in Newfoundland is the agent of the insurer.

Also the Insurance Act of Newfoundland defined the representative as A representative means a person who under authority conferred by an insurer, agent or broker, for compensation or commission or other thing of value solicits insurance Restricted to 1 insurer for 3 years

So the MGA in Newfoundland can act as the agent of the insurer. The physical person acting for the agent or insurer is called a representative. This means that Newfoundland is the only province where the existence of MGA is recognized and can be regulated.

The term agent is not defined in Quebec. An insurance agent cannot sell life insurance in Quebec. Only insurance representatives can sell life insurance. Since the MGA is not a natural person, the MGA cannot act as a representative. Does this mean that the MGA is undefined in Quebec?

Quebec: A representative in insurance of persons is a natural person who offers individual insurance products in insurance of persons or individual annuities from one or more insurers directly to the public, to a firm, to an independent representative or to an independent partnership. A representative in insurance of persons acts as an advisor in the field of individual insurance of persons and is authorized to secure the adhesion of a person in respect of a group insurance or group annuity contract.

In Quebec it is also stated that an insurance representative can when placing a risk with an insurer with which they have, or with which the independent partnership or firm for which they act has, a business relationship, disclose that relationship to the person with whom they are transacting business.

As a result, while MGA don't exist in Quebec, the existence of firms allows the creation of a regulated agency relationship between insurer and firm.

2. An agent/representative can sign an agent contract with as many MGAs he wants...

This is true and it is extremely dangerous. The insurer is delegating to the MGA the responsibility of the supervision of the agent. By splitting his business amongst many MGAs, the agent can circumvent this supervision since no MGAs fully know what the agent is doing.

Also when an agent splits his sales between 2 or more MGAs, he is now faced with having to fill a sales quota for each MGA. For example, if an agent does 30,000 sales credit with an MGA which provides him with an override bonus of 160%, if he splits this business between 2 MGAs, his bonus will decrease to 130%. He is now under pressure to increase his sales artificially such as selling permanent insurance when temporary insurance would have been the right advice and choiceto get back the 160% bonus.

3. The MGA only responsibility is to offer products

This is not true. MGAs are compensated on the premium paid every year at about 3% of inforce premiums. They are paid a lot of money to service life insurance policies that are placed through their MGAs. Sadly most MGAs pocket the money and provide little service to the consumers.

4. MGAs are not subject to possible conflicts of interest

This is not true. In order to have a MGA contract with an insurer, the MGA must promise to place a certain sales volume with the insurer. When I was at Manulife, the volume requirement was 500,000 sales credits in Quebec. 75% of MGAs were unable to meet their sales obligation and faced the risk of having their contract cancelled. As a result, an MGA may decide to influence its agents in selling the products of an insurer over the better product of another insurer in order to protect their MGA contract.

5. MGAs are only for autonomous agents/non-captive

This is not true. Many captive agents have access to an MGA. In most cases, the MGA is owned by the sponsoring insurer. For example, industrial Alliance has a MGA which is called Solicour allowing the captive agents of Industrial Alliance to place their business with other insurers. Consumers should however be careful. In many cases, captive agents are paid a lot less if they use the MGA versus selling the products of their sponsoring company. This is a conflict of interest.

6. The MGA is independant of the insurer

An MGA could be autonomous of the insurer but this is unlikely. There are many strings attached to the relationship between MGA and the insurer. An MGA can easily benefit from a loan from the insurer. An insurer could be a shareholder of the MGA. In all of these cases, there are no regulations as to the disclosure of these possible conflicts of interest.



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The Lafond Case Study

Lafond Services financiers, Cabinet de services was a MGA located in the province of Quebec which had a contract with Manulife. I was a Sales Director with Manulife for another distribution channel called the Direct Channel where the agent could sing a contract directly with Manulife instead of getting their agent contract through an intermediary such as Lafond.

One of the agents working at Lafond decided that he did not like to work there anymore. As a result, he wanted to move his agent contract somewhere else. He could have chosen another MGA but he decided instead to put his business through the Direct Channel.

When we made the request to have the contract and block of business of this agent transferred to the Direct Channel, Lafond refused the request stating that it did not want to surrender their right of ownership over the block of business of the agent. Could Lafond do this?

When an MGA signs a contract with an insurer, the contract states established the way the MGA will be remunerated. Most insurers pay a 3% servicing commission fee to the MGA. This 3% is applied against the amount of premium paid and renewing. For example, if there is a $1 million of inforce premiums, the MGA would receive $30,000 to service this block of business.

The right of the MGA to receive this service commission establishes an ownership right for the MGA over the block of business owned by the agent. The right of ownership of the MGA supersedes the rights of ownership of the agent over his block of business.

Usually when an agent transfers his contract and block of business to another MGA, there is an informal understanding that the MGA of origin will agree to waive its right of ownership in exchange for receiving a multiple of the servicing fee as a form of compensation. This happens automatically and allows the agent to transfer his contract.

However since this is an informal agreement between MGAs, an MGA could refuse to release its rights of receiving the service commission thereby blocking the transfer of the block of business of the agent. The agent could still transfer its contract but could potentially lose his block of business.

What does this mean to the consumer?

If an agent contracted through an MGA is not servicing you, you have the right to expect the MGA to provide you the service you are paying for. If an error or omission occurs, most MGAs will deny their responsibility stating that their role is only to provide the agent access to multiple insurers. This is not true. The MGA having a right of ownership and being compensated to provide service is as responsible as the agent. In a civil lawsuit, the MGA should be added with the agent as the defending party. You should in discovery request the MGA contract and the remuneration received by the MGA to provide service to policy holders


Broker versus agent?

The term broker represents little value to the consumer. The real question is whether using an autonomous agent is better compared to using a captive agent who can sell many insurers as well. When we look at the ability to access better products, we feel the autonomous has the advantage. There are less possible conflicts of interest for the autonomous agent if that agent does not deal directly with one insurer and if the agent uses one MGA only. With captive agents, because it is the norm for the sponsoring insurer to pay less if the captive agent sells the product of other insurers, the potential for a conflict of interest is greater. In terms of training, service and compliance, the captive agent has the advantage. In the end, it comes down to choosing the right advisor and we can help you do this through our ADVISORIGHT program


Mortgage Life Insurance versus traditional insurance...

There is a lot of misinformation regarding mortgage life insurance. Let's first deal with the myths:

1. My mortgage insurance will be cancelled if I change lender. This is false. If you buy the mortgage life insurance through a bank, the mortgage life insurance is usually NOT portable to another lender. However, if you buy the mortgage life insurance through a mortgage broker, the mortgage life insurance will remain in place even if you renew with a different lender. Mortgage life insurance should be considered to be group insurance. Portability will depend on who signed the master group insurance contract. If the bank signed and owns the master contract, then the insurance will not be portable to another bank. If the brokerage firm signed the master contract, then the insurance is portable because the ownership of the master contract is independant of the lender.

2. Mortgage insurance is subject to post claim underwriting. This is true but it is also true for all insurance. If you buy traditional insurance, the insurer will do post claim underwriting if the insured dies in order to review the information provided by the insured. There are countless cases where a claim was refused by an insurer in regards to traditional insurance. There are no data that supports the belief that claim denials is higher for mortgage life insurance than traditional life insurance.

3. The bank has denied the insurance claim. This is incorrect. A bank does not process a death claim. it is the insurer that processes the death claim. In that instance the bank or lender is only the messenger.

4. The main drawback with mortgage life insurance is that the amount paid on death is tied to the amount of the outstanding mortgage. Since the mortgage balance declines over time, the insurance is also declining while the premium remaims the same. The second negative is that you are unable to name a benificiary and choose who will receive the death benefit that will be paid.

5. Should I buy mortgage insurance? The answer is YES unless you have all the insurance that you need. First take the mortgage life insurance while ensuring that you take the time to read and answer carefully the questions found on the application. In the following months, you will have acclimatized to your purchase, and you should be ready to apply for traditional insurance based on the right amount determined through a rigorous need analysis. Use our need analysis web application to do this. If you are accepted as a standard risk without any forms of rating you can proceed in replacing the mortgage life insurance. If you are rated, your mortgage insurance is now valuable. Do not replace it. Keep it while considering adding to it by taking the traditional insurance that is rated.


Term or permanent insurance?


Most Canadians do not have enough insurance to cover their need and as result they should not be buying permanent insurance. Permanent insurance is only a need in very specific situations such as in business planning.

You should not consider permament insurance unless you have purchased all of the life insurance calculated in your need analysis. If you have enough life insurance, the life agent should have reviewed your need for disability and critical illness before talking about permanent insurance. Permanent insurance should only be used for estate planning. It should NOT be used for investment purposes or for supplementing retirement income. When shown as an investment, permanent insurance is a scam as revealed in the book Uraveling the Universal Life Scam


Life, disability or critical illness?

The first need is always life insurance. This is the need that you don't recover from. It is also the cheapest need to address.As a result, buy the life insurance that you need before buying any other type of insurance

Disability is the second need. If your employer is not offering you group disability, this need become almost as important as life insurance. Please note that if you are single without dependants, a need analysis would show your need for life insurance to be very small. While disability would still be secondary to life insurance, most of your insurance premium would go towards disability.

If your employer is offering you group disability insurance, then you have a choice to make. You may decide to top-up your disability insurance with an individual disability policy in order to extend the own occupation clause beyond 2 years. You may also believe that critical illness represents a greater risk. you would therefore buy critical illness insurance instead. While I prefer critical illness, at this point it is a matter of family history and preferences. Uncertain whether your agent is showing you the right solution. We offer you peace of mind with SolutionsRightwhere we will review the insurance solution proposed by your agent if you require a second opinion. Please note we do not sell any insurance. This is a consumer protection program and the only goal is to protect consumers. While this program is free, the consumer gives us the right to gather information and use that information in our research and publications.


Should I replace my insurance?

If an agent is proposing to replace your insurance, you should consider first what type of product you are replacing.

Replacement of term policies: Term insurance is considered a commodity. As a result, the replacement of a term policy will be driven by cost. A few years ago, during the term pricing wars, the cost of term insurance went down 10% every year. So you could literally replace a term policy every few years to save the policy owner a lot of money. Those days are gone. Therefore if a term is replaced, it is because it is approaching renewal and the premium will increase by a factor of two or three. The consumer should ask why he is faced with a renewal. Did the agent sell the right term with the right duration? If the agent sold him a Term 10 instead of a Term 20, the agent should be held accountable for his error.

Replacement of permanent insurance: There is a reason why it is called permanent insurance. There are no reasons that exist that could justify the replacement of a permanent insurance policy unless it has been incorrectly sold to you at the beginning or the current agent is trying to take advantage of you by replacing a good policy to generate commissions. If the cost is increasing on your permanent insurance it is probably because it is a YRT policy. Most YRT policies have a right of conversion to level cost of insurance. So you would convert the policy instead of replacing. However that conversiion does not generate commission while the replacement does. We offer you peace of mind with SolutionsRight where we will review the insurance solution proposed by your agent if you require a second opinion. Please note we do not sell any insurance. This is a consumer protection program and the only goal is to protect consumers. While this program is free, the consumer gives us the right to gather information and use that information in our research and publications.

Replacement form must be completed by the agent and presented to you prior a replacement. Please read these forms carefully to determine if surrender charges will apply to the replacement, will there be a taxable gain, will there be a loss of future benefits? A new policy will have a new 2 years suicide and misrepresentation clause.


What should I be getting from the agent ?

1. Need analysis: you should be getting a need analysis showing clearly why you need this insurance and what amount of insurance you need.

2. Quote of the 10 best companies for the cost of the product you are considering buying showing the premium for each company and the underwriting requirements for each company. Attached to this sheet should be the recommendation of the agent clearly explaining why he thinks you should select one particular company.

3.A list of the insurance companies that the agent authorized to act for.

4. The commission that the agent will receive from the insurer including bonuses. This should indicate if this commission differs by insurer and whether the agent will receive a higher commission by placing with the insurer he recommended. Uncertain as to who to select for an advisor?Let us do this selection for you by using AdvisorsRight . Our program will match you to the right advisor. Please note we do not sell any insurance. This is a consumer protection program and the only goal is to protect consumers. While this program is free, the consumer gives us the right to gather information and use that information in our research and publications.