Distribution through agents/representatives
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.
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
- 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,
- Tracking the representatives’ business submitted by a representative,
- Providing representatives with direct sales support,
- Facilitating the two way flow of information between the insurer and the representative,
- Pooling of commission payments for the representative from various insurers,
- Facilitating the submission of completed contracting requirements between a representative and an insurer,
- Training representatives,
- Providing service to policy owners,
- Providing market conduct compliance support to insurers, and, in some cases,
- 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.