Recent news about managing general agent (MGA) TruStar Underwriting’s legal action against its former CEO and other defendants has sparked discussion among the insurance community about MGA regulation.
As previously reported in Canadian Underwriter, TruStar has filed a statement of claim against its former CEO, Daniel Moses, two unnamed defendants (cited in court documents as ‘John Doe 1′ and John Doe 2’) and two unnamed business entities, alleging a scheme to defraud the company of $6-million. The MGA’s lawsuit seeks to recover the funds.
The allegations contained in the statement of claim have not been proven in court, which has already issued an interim order placing the MGA in receivership.
CU has reached out to the counsel for TruStar, who declined to comment, citing that the matter is before the court. CU has also reached out to the former CEO’s counsel, who has thus far not offered a comment.
With brokers now reportedly scrambling to assess their exposure to the TruStar situation, industry experts are discussing the state and efficacy of MGA regulation.
What are MGAs?
MGAs in the P&C insurance industry act as intermediaries between brokers and insurers.
Unlike brokers, MGAs don’t deal with clients directly. Rather, MGAs have delegated authority from insurers to underwrite policies, handle claims, and perform other insurance functions. They oftentimes cover specialty markets, or risks that are hard to place with primary insurers, sources tell CU. They have been described as “outsourced underwriters.”
Essentially, “they fall somewhere between a broker and an insurance company,” says Hugh Fardy, senior vice president of professional liability at Gallagher. “They’re not an insurance company because they accept no risk. But they do place business on behalf of insurance brokers who are placing business on behalf of the public.”
Market conduct is overseen provincially. And thus the licensing and regulation of MGAs varies by province.
“The evolution of the MGA in the last dozen years — we’ve probably doubled the number of MGAs in Canada [since then],” says Fardy. “And I think that’s where we need to see a dedicated and properly organized method of regulating MGAs.
“By no means do I advocate for making anybody’s life more difficult through regulation,” he continues. “I’m a firm believer you can regulate with consideration. And if you understand the way a brokerage, or MGA, or whoever, works, you can work with them to establish the checks and balances necessary to make them comfortable in how they do their job, so they’re protecting the public, but at the same time they’re internally efficient enough to be able to run a proper business.”
Current state of MGA oversight
In Ontario, the Financial Services Authority of Ontario (FSRA), which regulates insurers, does not have a specific licensing regime for MGAs.
“TruStar is not licensed by FSRA,” a FSRA spokesperson tells CU. “It has come to our attention that policies may have been put in place without authority and premiums for those policies were allegedly misappropriated in connection with commercial policies. We are in touch with insurers that do business with TruStar. FSRA will not be commenting on the court case at this time.”
MGAs can volunteer to license themselves as retail brokers through the Registered Insurance Brokers of Ontario (RIBO), the province’s self-regulatory body for brokers.
“Currently, MGAs are not required to be licensed under the Registered Insurance Brokers Act, as they do not deal directly with the public,” a RIBO spokesperson explained to CU in an email. “However, more than 80 MGAs have chosen to be licensed by RIBO, which means they must adhere to the same regulatory requirements as brokers.
“This includes requirements for licensees to establish trust accounts for premium protection, maintain specified insurance (fidelity bond, and errors and omissions), meet capital requirements, and adhere to the legislated Code of Conduct, Registered Insurance Brokers Act, RIBO’s guidance, and other legislative obligations.”
Non-compliance could lead to regulatory action, including possible licence revocation, RIBO says.
However, since this form of licensing is optional for MGAs in Ontario, “[our] authority to intervene is contingent upon whether a Managing General Agent (MGA) is registered as a RIBO licensee.”
Most Ontario MGAs have chosen to opt into this licensing regime, Steve Masnyk, managing director for the Canadian Association of Managing General Agents (CAMGA) tells CU.
Outside Ontario, MGAs must be licensed as retail brokers by the provincial insurance regulatory bodies, says Masnyk.
CU inquired with the Alberta Insurance Council (AIC), which regulates brokers, agents and MGAs in the province, about how the licensing and regulation of MGAs works in its jurisdiction.
MGAs are not “currently specified or defined” under the province’s Insurance Act, says an AIC spokesperson. But AIC does regulate MGAs’ insurance agency activities, including negotiating insurance and providing insurance policies on behalf of an insurer to clients.
“To sell insurance products and act as an insurance agent in Alberta, all businesses, including MGAs, are required to be licensed with AIC and hold licenses for each class of insurance they intend to sell,” an AIC spokesperson says.
“MGAs in Alberta must fulfill the same requirements as all insurance agents, such as holding errors and omissions insurance, and are subject to compliance audits.”
AIC says it also investigates complaints against insurance agents, brokers, and agencies.
“Regarding TruStar Underwriting, AIC is currently determining if Alberta consumers have been affected and to what extent,” the regulator tells CU.
Further west, the Insurance Council of British Columbia explained to CU how MGAs are licensed in the province.
“MGAs, including their staff, that conduct business in B.C. are required to be licensed by the Insurance Council, just like any other insurance agency,” their spokesperson wrote in an email. All insurance licensees, including MGAs, are required to follow the Insurance Council of B.C.’s Rules and Code of Conduct.”
RIBO, AIC and Insurance Council of B.C. have all published notices on their websites about TruStar, since the MGA held licenses with the three regulators.
What about codes of conduct?
CAMGA issues standards for MGAs via CAMGA’s Code of Ethics and Code of Business Operating Standards.
Association members must follow certain minimum standards as a condition of continuing membership. However, CAMGA membership is optional for MGAs. And these standards are not regulations.
“[TruStar] held a RIBO license in Ontario and retail broker licenses in most other provinces across Canada, as well as undertook to maintain the standards set in CAMGA’s Code of Ethics and Code of Business Operating Standards,” Masnyk tells CU.
“However, as occurs from time to time with any licensee, bad apples and their conduct are outside of the scope of regulatory oversight,” he says. “This appears to be one of those cases, [where] allegations [have been made] against one employee among the over 3,000 employed within the MGA channel.”
There are an estimated 80+ MGAs in Canada, according to previous CU reporting. More than 66 of them are CAMGA members.
TruStar was a member of CAMGA since 2021, although Masnyk confirms the association has since suspended its membership.
“Seeing all the allegations and investigations going on, it became prudent for [CAMGA’s] board of directors to decide whether the member was in breach of any of our two codes, and the board voted unanimously to suspend the membership of the member,” says Masnyk. “In addition, [TruStar] going into receivership in December also triggers the suspension of their membership within the association.”
This is a developing story. Please watch for a forthcoming story, in which CU publishes industry sources’ best practices for brokers and insurers to follow when working with MGAs.
Feature image by iStock.com/MicroStockHub
