On July 26, 2024, the Ontario Ministry of Finance launched a consultation on proposed amendments to the Insurance Act that would create a regulatory framework for life and health managing general agents (L&H MGAs) and those that perform the functions of L&H MGAs. The amendments set out the proposed licensing system while giving the Financial Services Regulatory Authority of Ontario (FSRA) authority to establish professional standards and make rules with respect to the required compliance systems. A Ministry of Finance consultation paper provides important additional information. Comments on the proposed framework will be received until September 9, 2024.

Background

The government’s initiative responds to the life and health insurance sector’s shift away from the traditional practice of selling insurance products through an insurer’s own agents toward a new model under which products are sold primarily through L&H MGAs and other third parties. The consultation paper notes that L&H MGAs now account for 65% of new individual life and health insurance sales across Canada.

Additional impetus for the changes comes from studies by FSRA and the Canadian Council of Insurance Regulators (CCIR) that have raised concerns about certain practices of some L&H MGAs.

Scope of the Licensing Requirements

Enforcement under the new regime would take account the size, complexity and risk profile of L&H MGA licensees, although the same rules would apply in all cases. Under the proposal, an L&H MGA licence is required of any individual or entity, including a corporation or a partnership, that, under an agreement with a licensed L&H insurer, provides any of the following services with respect to agents or (as applicable) prospective agents of the insurer:

• Recruitment and/or screening for suitability;
• Training;
• Supervision and/or monitoring;
• Entering into written agreements with agents who sell or solicit L&H insurance offered by the insurer;
• Reviewing insurance applications that agents have received; or
• Transmitting policies or applications between the insurer and an agent.

The term “L&H MGA” includes:

• National Accounts (NAs) and Third-Party Administrators (TPAs) performing the functions listed above; and
• Sub-MGAs, defined as MGAs to which a L&H MGA has delegated any of the functions listed above.

The term “L&H MGA” excludes:

• Property and Casualty (P&C) MGAs; and
• Accident and Sickness (A&S) MGAs (although consideration may be given to extending the requirements to A&S/health only MGAs, as per the request for comments, discussed below).

Note that an L&H MGA licensee would not be eligible to hold an adjuster licence under the proposal.

FSRA’s Rule-making Authority

Under proposed amendments to s. 121.0.1 of the Insurance Act, FSRA would be granted rule-making powers in this area, notably relating to the requirement that L&H MGA entities establish:

• Professional standards;
• A compliance system; and
• A compliance representative position.

According to the consultation paper, the professional standards are expected to be similar to those under the “Licences” and “Duties of Life Insurance Agents” under the Agents Regulation, including (among others) good character and reputational requirements as well as an absence of “demonstrated incompetence or untrustworthiness” or “fraudulent acts or practices” in the L&H MGA’s past. L&H MGAs must also have appropriate E&O and liability insurance.

The compliance system requirement in the Agents Regulation requires the insurer to have a system reasonably designed to ensure that the conduct of agents, including MGAs, is compliant. Currently, contractual provisions in agreements between insurers and their agents are often used for this purpose, which according to the consultation paper “gives rise to a gap where there is no formalized requirement at the MGA level in legislation”. Accordingly, the L&H MGA would be required to establish its own compliance system, including monitoring of agent suitability, incident reporting, periodic assessments of the system’s effectiveness and annual reporting to the insurer. Sub-MGAs would also be required to establish compliance systems. Other specific points include:

• The insurer’s contract with the L&H MGA would be expected to include specific compliance-related requirements;
• All contracts with L&H MGAs, material changes to such contracts, and compliance failures would be required to be reported by the insurer to FSRA;
• All agreements and amendments between an L&H MGA and a sub-MGA would be required to be reported by the L&H MGA to the insurer, along with any material changes and non-compliance issues;
• If the screening of applicants for an agent’s licence is delegated, the insurer must independently assess the relevant information and make the final decision about the applicant’s suitability;
• If the training of agents is delegated, the insurer must provide appropriate guidance, product marketing and materials to the L&H MGA.

Finally, the consultation draft offers some details about the requirements for the position of compliance representative, including with respect to knowledge, character and operational independence. The compliance representative, who would not need to be a licenced agent, would have oversight and reporting duties.

Transition

The Ministry of Finance is of the view that L&H MGAs currently licensed with FSRA as corporate agencies would have to transition to a FSRA L&H MGA licence. Alternatively, they could meet licensing requirements by adding an L&H MGA licence to an existing agent licence. All L&H MGAs that are carrying out functions such as soliciting and selling or submitting applications to insurers must continue to hold agent or corporate agent licences. A transition period will be announced to allow the necessary licences to be obtained.

Next Steps

The Ministry of Finance is now receiving public comments on the consultation paper and Insurance Act draft amendments. The Government is particularly interested in industry and public responses to 18 specific questions that are included in the consultation paper. Among the specific issues raised in these questions are whether:

• A need exists for the separate L&H MGA licensing class at all;
• A&S/health-only MGAs should be included in the new licensing class;
• A standardized compliance system for L&H MGAs should be prescribed;
• Disclosure or information-sharing requirements should be established between L&H MGAs and agents or sub-MGAs (and whether these should be prescribed); and
• Minimum contractual obligations should be established in legislation or by rule between insurers and L&H MGAs and/or between L&H MGAs and agents.

As noted above, the comment period closes on September 9, 2024. Instructions for submitting comments are provided in the Ministry of Finance’s announcement.

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