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									                      DISCUSSION PAPER ON THE




DISTRIBUTION OF LIFE INSURANCE PRODUCTS                                  OCTOBER 15, 2010


Over the last twenty years, the life insurance industry has seen a number of changes, with
some of the most significant changes coming from its distribution models. Twenty years
ago, the marketplace was dominated by career insurance companies, which recruited the
majority of life insurance agents (“life agents”). Career insurance companies recruited
life agents, provided their training and, once licensed, supervised their insurance practice.
Career insurance companies took responsibility and were accountable for ensuring their
agents were properly trained and qualified to sell the companies’ products.

Over the last 10 to 15 years, the career insurance company model has almost disappeared,
with only a few insurers still employing this distribution model. Now, new life agents are
recruited through a number of sources, with the primary source being life agencies. The
level of supervision, accountability and training that was inherent in the career insurance
company model has diminished and accountability for the actions of new life agents is
less clear.

Coinciding with the move away from a career insurance company model has been the rise
of the managing general agent (“MGA”). MGAs play a unique role in the distribution
model as they are a hybrid, performing certain functions on behalf of insurers while
acting and being licensed as a life agent.

While the changes to the distribution model were occurring, little was done to change or
adjust the regulatory environment under which life agents operate in British Columbia.
In the late 1990s, the educational requirements for licensing of life agents were updated,
resulting in the introduction of the Life Licensing Qualification Program (“LLQP”),
which came into effect in 2002. The LLQP established a higher level of education for
new life agents, which resulted in life agents entering the life insurance business with a
greater understanding of the insurance business and products. While the LLQP was a
step in the right direction, it addressed only part of the issue arising from the demise of
the career insurance company model.

Once licensed, a life agent is not subject to any mandatory industry oversight, which
differs significantly from all other sectors of the financial services sector (i.e., property
and casualty insurance, securities, mutual funds and real estate). With the exception of a
minimum experience requirement for nominees of life agencies, a life agent can work
independently and unsupervised as soon as a life insurance licence is issued. (Note:
While there is no regulatory requirement to do so, many life agencies and insurance
companies actively supervise and take responsibility for the insurance activities of their
life agents.)

INSURANCE COUNCIL OF BRITISH COLUMBIA                                         PAGE 1 OF 11
DISTRIBUTION OF LIFE INSURANCE PRODUCTS                                OCTOBER 15, 2010

The purpose of this paper is to open discussion on how Council can more effectively
regulate the distribution of life insurance products. Council is seeking to improve the
regulatory model to: provide the public with a level of comfort in the life insurance
distribution model; clarify the expectations and responsibilities of those involved in the
distribution of life insurance; and establish minimum requirements to create a more level
playing field.

This discussion paper outlines Council’s proposals to address the issues of supervision of
new life agents, the responsibilities of life agencies and the role/accountability of MGAs.

INSURANCE COUNCIL OF BRITISH COLUMBIA                                        PAGE 2 OF 11
DISTRIBUTION OF LIFE INSURANCE PRODUCTS                                   OCTOBER 15, 2010


This paper focuses on three particular issues to be addressed in the overall regulation of
the life insurance industry. The first deals with what level of supervision or mentoring
should be in place for new life agents. The purpose of implementing a minimum
supervision requirement is to ensure a more balanced development of new life agents.

The second issue is the role of insurance agencies. There has been growth in the number
of insurance agencies, with the number now over 1,600, resulting in the majority of life
agents now operating under some corporate umbrella. Unlike the general insurance,
securities, mutual funds and real estate industries, there are no guidelines or expectations
regarding the responsibilities of a life agency for those life agents that operate under their
corporate or partnership structure.

Lastly, the role of MGAs within the regulatory model needs to be better understood.
MGAs have contracts with insurance companies to perform certain functions - from
backroom operations to the handling of claims and even the granting of authority to a life
agent to represent specific insurers. MGAs play a significant role in many insurance
transactions and, as such, have a responsibility for any insurance business processed.

Set out below are Council’s views on the supervision of new agents, accountability of
agencies and nominees and the responsibilities of MGAs. While each issue relates to a
specific part of the life insurance distribution model, the intention is to address all three
issues concurrently.

a)     Supervision

At present, there are no specific or stated requirements governing new life agents* in
British Columbia. It is not uncommon for an individual to become licensed as a life
agent and immediately start working in the financial services sector without any
supervision. The life insurance industry encompasses a wide variety of products and
services which require varying levels of knowledge and sophistication. A new life agent
can engage in marketing any insurance product or service without sufficient knowledge
or understanding of the specific product and without any oversight.

By comparison, in British Columbia, general insurance agents and salespersons and
insurance adjusters have mandatory supervision requirements, which remain in place
until a minimum amount of experience and/or education is obtained. Similar
requirements exist for mutual fund and securities salespersons and real estate agents, all
of whom work in an environment that includes mandatory supervision and accountability

* For the purposes of this paper, a new life agent is defined as: someone obtaining a life
insurance licence for the first time; a life agent from outside of British Columbia with
less than two years’ licensed experience; or a person who gave up his/her life insurance
licence, are reapplying for a life licence and are required to re-qualify.

INSURANCE COUNCIL OF BRITISH COLUMBIA                                            PAGE 3 OF 11
DISTRIBUTION OF LIFE INSURANCE PRODUCTS                                  OCTOBER 15, 2010

Presently, the only qualification for a life agent’s licence is completion of the LLQP and
a qualification exam. Other than the LLQP, there is no prerequisite education (i.e.,
completion of high school), no post licensing education requirement and no experience
requirement as a condition of licensing. Once licensed, a life agent only has to maintain
an annual minimum continuing education requirement. The life agent model in British
Columbia is inconsistent with similar models in the financial services sector and other
similar professions. The ability of an inexperienced life agent to commence work in a
specialized field such as life insurance, without supervision or direction, is unreasonable
and fails to provide oversight consistent with the types of financial products sold.

In looking at this issue, and based on discussions with the industry, it is evident that there
are a number of life agencies and a few insurers that have processes in place to supervise
the activities of life agents doing business under their name. While these practices are to
be applauded, it is not uniform across the industry, leaving the insurance buying public
with no idea who is being supervised and who is not.

To address this deficiency, a mandatory supervisory requirement is being considered for
all new life insurance agents. If adopted, this proposal would establish a requirement for
new life agents to be under the direction/supervision of a qualified (experienced) agent
during the first two years* of a new life agent’s career.

A qualified life agent is an individual with a minimum of five years’ full time
experience** as a life agent, who must be continuously licensed while acting as a
qualified life agent.

This proposal would require a new life agent to identify a qualified life agent who is
prepared to accept responsibility for the insurance (and any related) activities of the new
life agent. Should a new life agent cease to have a qualified life agent overseeing his/her
insurance practice, the new life agent would be required to cease all insurance activities
until a new qualified agent is identified.

* Lesser requirements may be considered for new life agents who have recently (within
one year of making a licence application) obtained a recognized designation, such as a
CLU or CFP. This would encourage greater education and be consistent with Council’s
efforts to promote higher education. In such cases, the supervision period could be
reduced to one year.

** Exceptions to the five years may be considered. As an example, an individual with
three years’ licensed experience, along with management experience with an insurer or
having a recognized designation, could also be considered experienced.

INSURANCE COUNCIL OF BRITISH COLUMBIA                                           PAGE 4 OF 11
DISTRIBUTION OF LIFE INSURANCE PRODUCTS                                   OCTOBER 15, 2010

The level of responsibility of a qualified life agent overseeing the actions of a new life
agent will be conditional on a number of factors. Factors such as a new life agent’s:

       •       work experience;
       •       length of time licensed;
       •       education; and,
       •       demonstrated knowledge in a particular insurance product

would help determine the level of supervision required.

A qualified life agent would establish and implement prudent procedures to oversee the
insurance activities of new life agents. Should a problem arise, the qualified life agent
will be expected to demonstrate why he/she felt their supervision was adequate for the

Supervision is not a new concept, nor is it new to life agents. There are still a few life
companies that directly operate life agencies and a number of independent life agencies
that have supervision and compliance procedures for all their life agents. Council’s goal
is to establish a minimum standard that will apply to all new life agents.

b)     Life Insurance Agencies

In recent years, there has been a significant increase in the number of life insurance
agencies in British Columbia. As of March 2010, there are a total of 1,666 life agencies
and more than 12,000 life agents.

While criteria exists addressing how a life agent should conduct his or her insurance
activity, Council has not provided direction on the specific duties and responsibilities of a
life agency and its nominee. (For the purpose of this section, the focus is on life agencies
conducting retail insurance activities and does not include the duties and responsibilities
of an MGA.)

A life agency is an entity that is either a corporation or a partnership, holds an insurance
agent’s licence and, as a result, has a properly licensed nominee. A life agency can be
defined as either:

           •     a “sole-proprietor”, which is an agency with only one life agent (often with
                 no other licensed or unlicensed staff) and exists primarily for legal and tax
                 purposes; and,
           •     the multi-agent agency, made up of two or more life agents. The multi-
                 agent agency can be local or out of province and have one or multiple

For the purpose of this discussion, the focus will be on the multi-agent life agencies. The
sole proprietor agency referred to above is viewed as similar to an unincorporated
individual life agent.

INSURANCE COUNCIL OF BRITISH COLUMBIA                                          PAGE 5 OF 11
DISTRIBUTION OF LIFE INSURANCE PRODUCTS                                  OCTOBER 15, 2010

In accordance with Council Rules, every life agency must have a nominee. To qualify as
a nominee, an individual must be licensed for at least five of the last seven years; the
exception being where the life agency is a sole proprietor (in which case the nominee
does not require any previous experience). According to the Financial Institutions Act, a
nominee is defined as an individual who is a licensed insurance agent approved by
Council to exercise on behalf of the partnership or corporation the rights and privileges
conferred by the licence. Council Rules state that a nominee is responsible for all activity
conducted by, or on behalf of, the life agency.

Currently, there are no specific guidelines addressing the responsibility of a life agency
and its nominee for the business conducted on behalf of the agency. To address this
issue, guidelines are required that articulate the responsibilities of a life agency (and by
definition, its nominee) for the insurance activities conducted on its behalf. These
guidelines should address the level of supervision/oversight required by a life agency to
govern the activities conducted on its behalf. Most life agencies already operate in a
manner that involves oversight of the life agency’s activities, including those of the life
agents operating under the agency’s name. The objective is to establish a minimum
standard that all life agencies will follow.

Supervision should include such issues as:

   •   reasonable procedures and guidelines governing the insurance activities at the life
       agency. Such procedures and guidelines would cover all aspects of an insurance
   •   practices that ensure the client’s interests are always placed first;
   •   prudent compliance requirements governing related licensing and regulatory
       requirements, as well as requirements of insurance companies as they apply to
       insurance transactions;
   •   supervision and oversight of all life agents acting on behalf of the life agency –
       with the level of supervision being based on the experience of the life agents; and,
   •   non-insurance related activities that are not directly regulated by another financial

INSURANCE COUNCIL OF BRITISH COLUMBIA                                          PAGE 6 OF 11
DISTRIBUTION OF LIFE INSURANCE PRODUCTS                                 OCTOBER 15, 2010

Life agencies must be accountable for the actions of all life agents contracted/employed/
authorized to act on their behalf. The level and type of supervision required by a life
agency may vary depending on the number, education and experience of the life agents
acting on behalf of the life agency. For new life agents, the level of supervision may be
greater than that required for an experienced life agent with a recognized insurance
designation. In addition, there are general supervisory requirements governing handling
of funds, file management and documentation, client correspondence and non-insurance
activities relating to insurance clients that need to be considered (except where those
activities are already regulated by another regulatory body).

For life agencies and their nominees, there is a responsibility to have procedures and
guidelines in place to oversee all insurance activities conducted through the life agency.
While procedures and guidelines cannot prevent problems from arising, failure to have
any procedures or guidelines can be a contributing factor to a complaint or investigation.
To this end, Council will engage in discussions with the industry to develop guidelines
regarding what is the usual practice of the business of insurance as it applies to life
agencies and the obligation to properly oversee all insurance business conducted on the
agencies’ behalf.

c)     Managing General Agents

In British Columbia there are a number of life agents and agencies operating as MGAs.
MGAs in British Columbia are required to be licensed like any other person engaged in
life insurance activities. The licensing requirements are the same and there are no special
or unique requirements for an MGA. Consequently, the general principles that relate to
life agents apply to MGAs as well (i.e., confidentiality, Code of Conduct, disclosure,

What is not as clear is the role of an MGA in the distribution of insurance products and
how that relates to their life insurance licence and the oversight by Council. As there are
a significant number of MGAs licensed in British Columbia, Council believes it is
necessary to identify and communicate its understanding of the role of an MGA and the
responsibilities that attach to this role.

For the purpose of this discussion, an MGA is defined as a licensed life insurance
corporation or partnership that holds at least one direct MGA brokerage contract with a
Canadian life insurance company. (Note: An Associate General Agent “AGA” does not
fall within this definition and will be treated as a regular life agency.)

INSURANCE COUNCIL OF BRITISH COLUMBIA                                        PAGE 7 OF 11
DISTRIBUTION OF LIFE INSURANCE PRODUCTS                                  OCTOBER 15, 2010

An MGA is a conduit that facilitates business between the life agents, their clients and
insurers by:

   •   supporting and assisting a life agent in obtaining contracts with insurers. (While
       not a regular occurrence, Council has encountered situations where an MGA has
       advised it has the authority to grant contracts on behalf of an insurer);
   •   processing and tracking business submitted by a life agent through an MGA;
   •   providing life agents with sales support;
   •   facilitating the two way flow of information between the insurer and the life
   •   pooling of commission payments for the life agent from various insurers;
   •   facilitating the submission of contracting requirements between a life agent and
       an insurer;
   •   training life agents;
   •   providing compliance support to insurers in the event of a client complaint; and,
   •   assisting in the adjusting of claims on behalf of an insurer. (While not a common
       occurrence in the life insurance industry, Council has encountered MGAs who
       purport to have this authority.)

The purpose of this section is to focus on the role of an MGA. In its initial review,
Council found that some MGAs may operate primarily as an MGA but also conduct some
retail activity where they, or life agents acting under the MGA’s name, market insurance
directly to the public. If such activities are conducted by an MGA, that aspect of their
business will be viewed as the same as the business conducted by any life agency and the
MGA would have the same responsibilities as any other life agency for that type of

An MGA’s responsibilities and accountabilities differ from that of a life agency. A life
agent doing business through an MGA has a different relationship with the MGA than a
life agent doing business through a life agency. The key difference is the relationship
that exists between a life agent and an MGA. An MGA, because of its contractual
relationship with an insurer(s), has a primary responsibility to the insurer, not the life
agent. An MGA is contracted to provide a number of services on behalf of an insurer to
help facilitate the processing of an insurance application and issuance of an insurance
policy. While an MGA’s responsibilities may vary from insurer to insurer, it should be
noted that the insurer is responsible for all aspects of their products, including
application, design and performance, as well as all marketing material in either paper or
electronic format.

The client is usually not aware of the existence of the MGA, nor the role it plays in the
insurance transaction. Generally, an MGA is not involved in the discussions between a
life agent and the client, and plays no role in the life agent’s recommendation of a
product. It is the insurer that is ultimately responsible for its products and has an
obligation to ensure the product being sold to the client is in the client’s best interest.

INSURANCE COUNCIL OF BRITISH COLUMBIA                                          PAGE 8 OF 11
DISTRIBUTION OF LIFE INSURANCE PRODUCTS                                 OCTOBER 15, 2010

While the MGA role is often viewed as a “backroom operation”, this should not be
interpreted to mean an MGA does not have any responsibility in the insurance
transactions it processes. An MGA contracts with an insurer and this contract sets out
responsibilities and obligations to the insurer. An MGA is compensated by the insurer
for the functions it performs under the contract. An MGA that fails in its responsibility to
fulfill these obligations could be subject to review and disciplinary action by Council. In
this regard, it is incumbent upon an MGA to clearly understand (preferably in writing)
the expectations of the insurer under the MGA contract.

MGAs actively recruit life agents to use their services. In doing so, MGAs have a
responsibility to ensure the life agents from whom they accept business are qualified,
competent and reliable. (The idea that all an MGA has to do is be satisfied a life agent is
licensed is not sufficient.) This responsibility could be defined as “knowing the life
agent”. All life agents are not created equal. They have different education, training and
experience. In recruiting life agents and accepting insurance business from them, an
MGA has an obligation to be satisfied the insurance business being submitted is
consistent with the MGA’s understanding of a life agent’s abilities.

Factors that should be part of an MGA’s process when accepting insurance business from
an insurance agent include:

   •   the work experience of a life agent, including the amount and type of business
       experience, education/training, etc.;
   •   the amount of experience the MGA has had with a life agent – an MGA would
       likely take a closer look at insurance business submitted by a newly contracted
       life agent over one with whom the MGA has been doing business for years;
   •   a life agent’s “expertise” – if a life agent has only ever submitted one type of
       business and then starts placing business in another area of life insurance, the
       MGA should take steps to be satisfied the life agent is competent in that field;
   •   sudden changes in volume, either a significant increase in the business being
       placed or significant cancellations in the business.

MGAs are responsible for the business they process and could be held accountable if an
insurance transaction is found not to be in a client’s best interest. While the
accountability will not be the same as it is for supervising life agents or life agencies,
where it is determined that an MGA acted contrary to its contract with an insurer or failed
to properly “know its life agent”, regulatory action may be a possibility.

The industry needs to know what Council’s expectations are concerning the role and
responsibility of an MGA. This requires a clear definition of what an MGA is and what
is expected of them. By distinguishing the role of an MGA from that of a life agency, the
industry will better understand the responsibilities of each and this will assist Council in
determining an MGA’s role in an insurance transaction.

INSURANCE COUNCIL OF BRITISH COLUMBIA                                         PAGE 9 OF 11
DISTRIBUTION OF LIFE INSURANCE PRODUCTS                                 OCTOBER 15, 2010

Failure to define the role of an MGA leaves a significant segment of the insurance
distribution model operating in a vacuum, with MGAs not knowing to what level of
responsibility/accountability the regulator is going to hold them. Setting out regulatory
expectations will assist in establishing a level playing field among MGAs.

To develop effective guidelines for MGAs, Council is seeking industry feedback on the
development of guidelines that will assist in differentiating the role of MGAs from life
agents/agencies. Areas of interest include:

       i)      contractual obligations between MGAs and insurers;
       ii)     contractual obligations between MGAs and life agents;
       iii)    MGAs responsibility, either directly or indirectly, to the client (purchaser
               of product);
       iv)     whether MGAs should be subject to a different licensing model (i.e.,
               different experience/training level; errors and omissions coverage; trust
               accounts; capital requirements; etc.); and,
       v)      whether there should be restrictions or limits on MGAs activities (i.e.,
               claims handling).

Once industry feedback is received, Council will develop draft guidelines regarding the
operation and conduct of an MGA.

INSURANCE COUNCIL OF BRITISH COLUMBIA                                        PAGE 10 OF 11
DISTRIBUTION OF LIFE INSURANCE PRODUCTS                                 OCTOBER 15, 2010


The goal of this discussion paper is to work toward a comprehensive set of
rules/guidelines involving the distribution of life insurance products. This discussion
process represents the first of a multi-step process. This discussion paper is intended to
provide the life insurance industry with information on Council’s concerns with the
current regulatory model, as well as possible solutions and direction. Council will
engage in industry discussions on its proposals and welcomes alternate ideas.

Persons wishing to provide feedback are asked to provide it, in writing, by
December 17, 2010. All comments should be submitted to the attention of:

                                    Mr. Gerald Matier
                                   Executive Director
                          Insurance Council of British Columbia
                     P.O. Box 7, Suite 300-1040 West Georgia Street
                              Vancouver, British Columbia
                                        V6E 4H1


Once the comment period is complete, Council will review the feedback and publish a
series of recommendations to allow for further industry comment.

INSURANCE COUNCIL OF BRITISH COLUMBIA                                        PAGE 11 OF 11

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