Ontario Insurance Regulator Releases its Key Areas of Life and Health Market Conduct Assessment

The Financial Services Regulatory Authority of Ontario (FRSA) recently released its 2020-2021 key areas of market conduct assessment for the life and health insurance sector. All FSRA-licensed life insurance companies in Ontario may be subject to a supervisory or thematic review.

FSRA’s two key priorities for assessment are:

  1. the implementation of Fair Treatment of Consumers (FTC) principles across distribution channels; and

  2. a review of the relationship between insurance companies and Managing General Agencies (MGAs).

FSRA views FTC and insurance distribution as two areas that have a material impact on consumers. In its market conduct assessment, FSRA will review: (1) how insurance companies are implementing FTC principles throughout their organization and the product lifecycles: and (2) whether changes in the MGA insurance distribution system need to be made.

FTC Review

The context of the FTC review is the joint issuance in 2018 by the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) of the Guidance Conduct of Insurance Business and Fair Treatment of Customers (Guidance). The Guidance was developed in Canada based on international standards and applies to underwriters and distributors, including MGAs.

FSRA is continuing to work collaboratively with other regulators through the CCIR’s Co-operation Supervisory Oversight Committee (CSOC) to conduct FTC reviews of federally incorporated insurance companies. Québec’s insurance regulator, the Autorité des marchés financiers, has been conducting similar reviews with respect to FTC principles.

Even though both insurance companies and intermediaries are subject to the Guidance, insurance companies are ultimately responsible for compliance with FTC throughout an insurance product’s lifecycle. FSRA will consider the following questions in conducting a FTC review:

  • Corporate Governance: does the insurer maintain a structure of reporting relationships between management and senior officers that provides effective oversight and ensures that FTC is reflected within the insurer’s values and culture?

  • Agent Training and Outsourcing Arrangements: do the insurer’s policies and procedures, agent suitability factors, and nature, timing and extent of training meet FTC requirements?

  • Incentives and Remuneration: do remuneration policies and procedures, agent compensation structure, and incentives drive fair treatment of consumers, and does the insurer assess risks periodically to ensure that consumers are being sold appropriate products?

  • Product Marketing and Advertising: does the insurer provide sufficient product information throughout the sales process to allow a customer to make an informed purchasing decision?

  • Information Provided to Customers: are customers provided with appropriate information, including insurer policies and procedures, and does the insurer have a formal process, taking into account FTC, to provide information to consumers before, during, and after sales?

  • Claims Handling: does the insurer’s claims handling policy reflect FTC principles and incorporate FTC elements, including standard processing times?

  • Complaint Handling and Dispute Settlement: does the insurer have formal complaint handling and dispute settlement policies and procedures and does the insurer inform customers of the existence of the complaints process and response timelines?

In keeping with its commitment to transparency, FSRA has provided sample questions for insurers to consider in advance of a review of their FTC compliance. In its conduct of an FTC review, FSRA will consider FTC measures at all stages of the insurance product life cycle, from agent onboarding, training and supervision, through the sales process and interaction with customers, to claims and complaints handling, including the insurer’s corporate culture and values.

FSRA has noted that insurers are increasingly outsourcing agent onboarding, training, compliance and supervision to MGAs. Although MGAs are a relatively new distribution channel, they account for a large and growing proportion of new life and health insurance premiums in Canada. As insurance companies have delegated some of their supervision responsibilities to MGAs, FSRA is now undertaking a review of the relationship between insurance companies and MGAs.

MGAs Review

FSRA will review the relationship between selected insurance companies and the MGAs they work with to better understand how companies are distributing their life insurance products, and assess effective governance and risk management of MGAs. FSRA intends to identify potential gaps in roles and responsibilities between the insurance company, MGAs and independent agents. FSRA is expected to set expectations for insurer leadership (board and senior management) to oversee MGA conduct, to help protect consumers.

FSRA has published a detailed Insurer-MGA Relationship Review Program questionnaire. The questionnaire focuses on the insurance company’s due diligence and screening of MGAs, agreements with MGAs and supervision and monitoring of outsourced functions.

FSRA will look at the number of MGAs and independent life agents contracted, and the due diligence that insurers perform on these intermediaries. The scope of the review will focus on the following key areas:

  • Distribution Channels: reviewing the different types of distribution models employed by an insurer including the proportion of business between distribution channels, the number of contracted agents, and the overall product delivery strategy;

  • Screening and Onboarding of MGAs and Agents: looking at the overall insurer practice, including strategy for selecting MGAs, due diligence considerations, policies and procedures, and agent-related authorizations;

  • Agreements and Contracts between Insurance Companies and MGAs: reviewing the contractual conditions and scope in these agreements, performance measures and obligations, outsourced functions and responsibilities, as well as agent oversight functions; and

  • Supervision and Monitoring of Outsourced Functions: exploring oversight of delegated agents, including the oversight functions and responsibilities of these agents.

As the Canadian Council of Insurance Regulators (CCIR) FTC Working Group is reviewing past insurer presentations on incentives and compiling a list of follow up questions, FSRA is not focusing on incentives management as part of its review.

Other distribution channels such as group insurance, insurance company employees, direct/exclusive agent, and national account distribution are excluded from the current assessment. However, consolidated recommendations and expectations arising from the review of the MGA distribution channel may still be applied to insurers’ oversight of other distribution channels when applicable.

While many new insurance regulatory and oversight initiatives were paused during the COVID-19 pandemic, the release by FSRA of key assessment areas gives insurance market participants a sense of how FSRA will be triaging its regulatory and compliance resources.

Regulators in other jurisdictions are also focused on the MGA distribution channel. Effective January 1, 2020, Saskatchewan became the first jurisdiction in Canada to establish an MGA class of insurance intermediary in the Insurance Act (Saskatchewan), requiring MGAs operating in Saskatchewan to be licensed.

Insurance market participants looking to discuss these issues and developments in market conduct regulation are invited to reach out to the authors.