Experts on why brokers need a market approval process when dealing with MGAs

Managing general agents (MGAs) are important players in the Canadian P&C insurance ecosystem. However, it’s important brokers take steps to ensure they’ve properly vetted alternative markets before placing customers with them, experts tell Canadian Underwriter.

The same goes for insurance companies: Know your MGA before outsourcing underwriting to them, sources tell CU.

The topic of MGA oversight first emerged when the Financial Services Regulatory Authority of Ontario (FSRA), which regulates insurer conduct, released insights from its supervision plan of MGA and insurer outsourcing relationships. Announced in early 2024, the provincial regulator’s goal was to better understand the existing relationships between MGAs and insurers to support the fair treatment of consumers.  

Recent news regarding TruStar Underwriting has raised the topic once again amongst the industry. TruStar has taken legal action against its former CEO, two unnamed defendants, and two unnamed corporations, accusing them of jointly scheming to defraud the MGA of $6 million.

These allegations are contained in TruStar’s statement of claim, and are not proven in court. A statement of defence has yet to be filed, and counsel for the former CEO have thus far not responded to CU‘s attempts to reach them.

Brokers and insurers tell Canadian Underwriter they are acting fast to find coverage for clients who believed they had secured coverage through TruStar, but recently found they did not obtain policies as a result of the alleged fraud. 

Hugh Fardy, senior vice president of professional liability at Gallagher, recently raised the topic on LinkedIn, saying some brokers may not have enough steps in place to properly vet MGAs before placing clients with them.  

That creates potential errors and omissions (E&O) risk for brokers, he says.  

Brokers’ market approval process 

As outlined in CU’s recent reporting, MGA licensing and regulation in Canada varies by province. 

Fardy believes there should be common operational or regulatory guidelines across the country. In the meantime, he says, brokers can take steps to vet MGAs before doing business with them.

“Often MGAs are sought out by brokers who are desperate to find capacity for a risk and, in doing so, they may end up placing business with…markets about which they don’t have any information,” he says.  

“There should be what I call a ‘market approval process’ in every broker’s office, where management examines [the MGAs] their staff is using and want to use,” he tells CU. “So at least they know who they’re dealing with, who owns them, where they’re located, what the contact information is, what markets are they representing — all that kind of stuff.” 

It’s the same scrutiny brokers would be use before signing any new market contract, says Fardy, whose has more than 50 years of experience in the broker business.

Other items to consider may include what the contract says regarding terms and changes, what level of underwriting experience they possess, and more. The intent is for brokers to have those details on hand, which would help them respond more swiftly if something occurs. 

Wordings, he says, should also be made available to brokers before binding a risk.

“Not that long ago, there were MGAs who would not give a copy of a wording to a broker until they bound the risk,” he adds. “Well, how can you possibly bind risk as a broker, not knowing what the wording says?” 

“It’s a risk to brokers,” he says, “and brokers are representing the public.” 

Insurers’ due diligence 

On the insurance company side, FSRA’s recent review says: “Insurers are ultimately accountable for ensuring the intermediaries they outsource to, including MGAs, comply with regulatory requirements such as FSRA’s Unfair and Deceptive Acts and Practices (UDAP) Rule.”

In Ontario, 58 insurers of the 218 reviewed outsourced functions to MGAs in 2023, FSRA’s findings show. Additionally, 6% of Ontario’s total P&C direct written premium (DWP) was generated through MGAs in 2023, while nine insurers wrote more than 50% of their DWP with MGAs. 

One hundred and thirty-nine MGAs were contracted with at least one or more insurers to distribute Ontario risks, the report shows.  

“Our review found that the P&C MGA market share in Ontario is limited,” says Beata Morris, director of P&C insurance market conduct at FSRA, in the regulator’s new market insights. “However, MGAs provide consumers with specialized expertise and insurance coverage, fulfilling unique needs.

“With growing reliance on MGAs, insurers are expected to have robust controls and exercise oversight to ensure that the insurer complies with applicable regulatory requirements including fair treatment of consumers when products or services are distributed through MGAs.” 

If not done, FSRA says risks to consumers include: 

• “Non-disclosure of conflicts of interest that may reduce consumer options to the best available service or product. 

• Non-disclosure of the insurer underwriting the risk, which can lead to delays in accessing coverage, potential lapses in coverage, and confusion in directing complaints. 

• Poor claims management and delays in claim payments. 

• Mismanagement of policyholder funds (e.g., not following formal trust arrangements with insurer(s)) which may lead to gaps in coverage and insufficient funds to pay claims. 

• Inadequate or insufficient E&O and/or fidelity insurance to cover the MGA’s activities, which could result in consumer harm. 

• Insufficient notice of cancellation or non-renewal of policies which may create challenges for brokers in finding alternate coverage and for consumers in accessing coverage.” 

FSRA says the observations from its report will be incorporated into insurer oversight work to identify future priorities, with its greatest area of focus on consumer harm.  

Feature image by iStock.com/ridvan_celik