Monday, January 10, 2011

(No.131) The Globe looks at insurance distribution [Pt.1]

On Dec.18, 2010 the Globe and Mail newspaper (Toronto) began a series of articles by Tara Perkins and and Grant Robertson billed as "Unprotected: Inside Canada's Insurance Industry". The first part "Through the loophole: How an industry outgrew its regulators" purports to identify "a new distribution channel that is beyond the regulators' grasp ...."

The channel in question is the Managing General Agent (MGA) part of brokerage, MGA being the U.S. coined usage.[ MGA distribution is a long way from being new in Canada and the inhabitants of the MGA system are not unlicensed.] A second article in this series, also with a focus on life insurance agency distribution," What your broker doesn't want you to know", followed on Dec.22.

These Globe articles touched on several of the issues including career compared to brokerage distribution about which I editorialized many times beginning three decades ago in my own Canadian Journal of Life Insurance, in columns I did for other publications and in speeches to industry audiences across Canada and in the U.S. I was not surprised therefore that before I had even begun to look at the newspapers of Dec.18 I received an email from a former colleague in the life insurance industry directing my attention to the Globe article and calling it "a real vindication of everything you tried to tell them for years ...."

Well, yes and no.

This was soon followed by a minor flood of emails from life insurance industry people calling for/predicting a commentary from me on the Globe articles and an addressing of the articles' errors of omission and commission as well as the absence of that ever present agency reality: shades of grey.

I am flattered by the expectations but also somewhat reluctant since it would take as much space as in the articles and more for me to really address what could be said in the cause of improving understanding.

If I have learned anything during my time working in and writing about the life insurance business it is this: the least understood aspect of it in the media and analyst communities as well as among too many life insurance company executives is agency distribution in its various forms even though -- as I never tire of pointing out -- at the end of the day the business is about 'selling stuff'.

Some of the shortcomings and problems the series of articles identifies are in fact an unfortunate but inevitable minor risk from having distribution by licensed sales persons of ANY financial product and, absent a compliance officer at every sales person's shoulder, a risk that will continue to exist. Also they are not new risks nor are they peculiar to the MGA system. The risk is unavoidable in ANY distribution system where a (licensed) sales person deals with a client one to one in the privacy of the client's home or office or indeed the sales person's office.

In the context of the defrauding of the insurance consumer, the sort of case used anecdotally as evidence for the MGA system problem in the first Globe article is part of a reality:

there is always in agency distribution a risk that a sales person may act wrongly and convince a client that he or she can get a higher rate of return on their money by having the sales person 'invest' it somewhere other than in a financial product of the institution with which the client understands the sales person to be exclusively or primarily associated. It is the Bernie Madoff syndrome writ small. The outright defrauding of clients, relatively infrequent, can and has occurred involving licensed life insurance intermediaries in ALL parts of the active agency system, including the best managed and supervised career agency systems of the very best life insurance companies -- as I know as a matter of first hand knowledge.

The MGA distribution system per se identified by the article as "unregulated" is no more formally unregulated than the career agency sector of the active agency system or the segment featuring individual broker/independent agents who place business directly with a life company. It is the positioning of the MGA between the life company and the licensed sales intermediary that provides a natural focus of attention.

That having been said there are important questions here. For example:
  • what ought to be the accountabilities of the MGA as a conduit through which some individual agents/brokers choose to place new business with issuing companies? and
  • what should be done about the MGA role serving as a cover behind which some life companies like to hide from an appropriate level of accountability for what goes on in the marketplace involving the sale of their financial products by licensed intermediaries?
In my experience (which includes many years as the chair of the standing Committee on Distribution and Intermediaries of the Canadian Life & Health Insurance Association [CLHIA]) the provincial insurance regulator who had the earliest and most thoughtful interest in the role of the MGA vis-a-vis insurance regulation is Gerry Matier, the Executive Director of the Insurance Council of British Columbia. Matier is a very sharp, experienced and energetic regulator and he, more than any other, was the driving factor behind the current regulatory look that embraces MGAs among other matters.

The Globe article draws a comparison unfavourable to the MGA system with the supervisory relationship of a career company with its agents; MGAs in the main do not exercise the same level of interest/compliance supervision as do those life companies with their own career agents. That is valid in terms of some companies and some MGAs but it is not universally the case and is subject to individual assessment.

The reality is that even the best companies operating career agency distribution systems are no more subject to a provincial regulatory regime specific to them and the operation of their career systems than are MGAs. Managing General Agents operate in a world of licensed sales people. But is there a specific regime applicable to MGAs beyond what is required of them as licensees? No. Have many life insurance companies fallen in love with distribution involving MGAs as an easier and less costly avenue of distribution? Yes.

Nothing that can be said to approximate a regulatory regime peculiar to career agency systems in Canada has existed since the removal long since of the agent single company representation rule and required life company sponsorship of licenses for life insurance agents for as long as they were selling. However that is no reason NOT to consider whether requirements specific to the role of the MGA and to the companies using them would be helpful to the consumer and to the marketplace.

Most of the 'news' delivered by the Globe articles (for example: brokerage life companies compete for the attention, affiliation and new business of licensed agents using compensation as a major tool) has been a commonplace among provincial insurance regulators for decades. If it has remained unknown to or little understood by the financial media and analyst communities (the group I have dubbed in these columns 'the financial services paparazzi') it is because they failed to do minimal homework to educate themselves on the reality of life insurance distribution generally and the agency system in particular.

However let me state this clearly: the Globe and Mail deserves very considerable credit for devoting serious and extensive attention to life insurance agency distribution in Canada and related issues. I cannot recall a single article in any Canadian daily newspaper presenting such an extensive look at life insurance agency distribution in this country. The articles, regardless of their shortcomings, are welcome and long overdue in the mainstream media.

Regardless of the bumps on the road along which the Globe reporters travelled in their examination of the MGA distribution system in Canada today, it is the right road. A superior career agency system, one managed by a life insurance company that is willing to assume -- not try to dodge -- its logical and appropriate accountability for those who sell its products in the marketplace is, as I have long preached, the best distribution system overall for life insurance consumers for a range of reasons.

Another part of my oft-delivered sermon has been this: life insurance companies should not be allowed to shelter from accountability to clients for deficient actions by those who sell their products behind a wall (legal and/or regulatory) comprised of those who facilitate the sale of the company's financial products. That is so whether those sales persons are MGAs, individual agents placing business directly with a brokerage company or via an MGA or a company's career agent.

Finally, in this same connection, Jim Rogers -- the former head of Advocis and MDRT as well as a successful Vancouver insurance and mutual fund brokerage operation -- made an essential point in his Dec. 21 letter to the editor of the Globe prompted by the first article in the insurance series: "Product manufacturers (i.e., insurance companies) should be held [vicariously] liable for the actions of both their Managing General Agents and the agents who put their business through these MGAs." [The Globe removed the word vicariously from his letter as published.]

There is much more that can and likely should be said in response to these articles and the issues they raise. I shall return to them in a future column.


Alastair Rickard