Canadian Underwriter

Managing the MGAs, the brokers’ brokers

May 25, 2016   by Sara Tatelman

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They’re the brokers’ brokers. No, they don’t tailor coverage for top producers’ vintage car collections or show up at a popular insurer-sponsored bonspiel singing the praises of E&O for the brokerages. But by finding coverage for specialized risks a brokerage can’t place on its own, managing general agents are to retail brokers what those brokers are to the public.

A brokerage “might have one market that does personal lines, one that does commercial property, none that do environmental, for example,” says Jodie Kaufman Davis, managing director of Burns & Wilcox Canada in Toronto. “If, let’s say, a commercial property insurer declined a risk, then they don’t have an in-house market, and they have to seek help from an MGA, typically.”

The strangest risk I’ve ever placed

“We had the Toronto Blue Jays here in the early 80s and we had to provide weather insurance for them,” says Grant Kimball. “In and of itself, that would be a pretty tough thing for someone to find because it’s not like the Blue Jays come to Saint John, N.B. everyday.”

The policy stated tickets would be refunded—and insurance would kick in—only if it rained more than five millimeters during game time. “As it turned out,” Kimball says, on game day, “it didn’t rain. It snowed.”

The Jays played through.

And regulation for those helpful MGAs can get complicated. Each part of the country has its own way of working (see next page) and the licensing breakdown is only becoming more fractured. In late 2014, for example, Saskatchewan updated its decades-old Insurance Act, and the new legislation includes a separate MGA licensing system. The act has received Royal Assent but likely won’t be proclaimed until the second quarter of 2017 when its accompanying regulations will be fleshed out.

Ron Fullan, executive director of the Insurance Councils of Saskatchewan in Regina, points out that “whether you’re a broker selling or an agent that works directly with an insurance company within a career environment, [you] all get the same type of license,” which is similar to the licensing processes in the other western provinces.

The new act won’t change the qualifications MGAs must meet, but it will give them the authority to recommend— and supervise—retail brokers for licensing. At the moment, only insurers can do so. The change, Fullan says, “is really just recognizing that [MGAs] are a separate type of entity and a separate licensing category makes perfect sense.”

But the legislation also requires MGAs to show their contracts with insurers to the regulator, says Laurie LaPalme, a partner with the law firm Cassels Brock in Toronto. “That’s their competitive advantage. Their whole business plan is written into the agreement. I don’t know whether MGAs are going to want to deliver up their binding authority arrangement.”

Band of brothers

In early 2015, two MGA presidents—Mark Woodall of Special Risk Insurance Managers in B.C. and Grant Kimball of Angus-Miller in New Brunswick—started to form the Canadian MGA Association. A division of the American Association of MGAs, it aims to establish a self-governance framework that will include education and ethics.

“Some MGAs are operating as, we think, cowboys,” says Woodall. “What I mean by that is they’re not necessarily following the rules… Some are working out of their house. Is that really a professional situation on behalf of our industry? And the answer is yes and no. In some cases today, you don’t need an office because of the capabilities of the online systems, the capabilities of electronic communication.”

So far, says Kimball, 15 of Canada’s approximately 85 MGAs have joined the association.

She also points out Saskatchewan “received significant criticism from the advocates [Canadian Council of Insurance Regulators] and the independent financial brokers of Canada” over the legislation’s wording. “…They think it’s confusing, there’s an overlap and the way that they’ve cast the broadness of the three, there is the potential—and this is the complexity of it—one person may actually have to get an agent license, an MGA license and a [third-party administrator] license.”

The provincial council, however, will still hear any broker complaints about MGAs. Some stakeholders don’t believe that is necessary, since insurers have traditionally audited and monitored the MGAs they work with.

“…We have a lot of governance and a lot of oversight from the companies that we represent,” says Grant Kimball, president of Angus-Miller in Saint John, N.B. “So we have to follow the rules and regulations of Economical. We’re audited by Economical. So we very much fall under their guidance. Also, with our Lloyd’s contracts that we have, we have annual audits,” which he says are more rigorous than what many retail brokers undergo.

Saskatchewan’s changes may trickle through to Alberta and B.C. at some point, although Gerry Matier, executive director of the Insurance Council of B.C., doesn’t think it’ll be anytime soon. “We’re quite happy with the model that we have. We think that at the end of the day, it’s half a dozen of one, six of the other.”

Eastern Canada is even less likely to adopt MGAspecific licensing, says LaPalme, “unless they feel undue pressure in the market to do so or think that it really works well because they just think, ‘Oh, that’s the West.’”

Regulations by region

M&A for MGAs

Since MGAs sit between insurers and brokers, an acquisition from either end raises questions about their impartiality, and independence can be a big selling point.

“If you take some of our clients, who are some local or regional independent brokers, and they send us business, they’re not helping their competition,” says Jodie Kaufman Davis. “If they send business to an MGA that’s owned by a large broker like Marsh or Hub, for example, then they’re helping their competitors get stronger.”

Grant Kimball concedes that there’s “always the fear that [insurer- owned MGAs] are going to sell to their master” but then “they’d be wasting their investment because then my value proposition as an MGA would evaporate overnight.”

In 2014, Mo Kaur, senior vice-president at Vancouver-based MGA, Premier, seemed to side with Kaufman Davis on the question of MGA independence. “When you give business to a wholesaler/MGA owned by a retail brokerage, you’re actively making your competitors stronger,” he said in an article in Insurance People.

In the same article, Premier president and COO Troy Moreira pointed out, “In cases where the MGA is owned by a carrier or single Lloyd’s syndicate, they can only offer the broker force that one risk appetite.” In April 2015, The Co-operators purchased Premier. Premier did not respond to a request for comment.

Copyright © 2016 Transcontinental Media G.P. This article first appeared in the May 2016 edition of Canadian Insurance Top Broker magazine

This story was originally published by Canadian Insurance Top Broker.