Executive summary

As announced in June 2023, FSRA continues to build its supervision capacity and market intelligence in the Property & Casualty (P&C) Insurance sector. FSRA is working with the P&C Insurance sector to develop a deeper understanding of the entities involved in product manufacturing, distribution, claims management and service to ensure fair outcomes for customers. This work includes prioritizing a review of insurers’ outsourcing relationships with P&C Insurance Managing General Agents (MGAs).

The role of MGAs

In pursuit of its vision of financial safety, fairness, and choice for Ontarians, FSRA has gathered market intelligence to better understand the role MGAs play in the P&C Insurance industry. For example, for brokers, MGAs offer an alternate market for complex and hard-to-place risks. For insurers, MGAs offer distribution, marketplace access, and underwriting expertise they may not otherwise have for certain lines of business. P&C MGAs can be key to ensuring access to coverage, especially for business customers.

Risk and oversight concerns

However, FSRA has identified examples of MGA business practices that may result in harmful or unfair outcomes for customers. While MGAs may perform traditional insurer functions, they are not required to hold a licence to operate in the business of insurance in Ontario. In addition, insurer oversight of the activities they outsource to MGA’s varies widely. Without appropriate oversight, customer’s interests may not be given adequate attention when multiple intermediaries are involved in the development, distribution, and servicing of insurance.

Launching review of P&C insurers’ MGA oversight practices

FSRA expects customers to be treated fairly throughout the life cycle of insurance contracts, regardless of whether the insurer deals directly with its customers or outsources activities to a third party. Given the risks and oversight concerns involved, insurer outsourcing to P&C MGAs is a priority supervision area for FSRA.

To validate and support our preliminary work, FSRA is launching a review of P&C insurers’ MGA oversight practices. The review will help to ensure outsourced functions are carried out in a manner that is fair to customers and complies with the Insurance Act, regulations under the Insurance Act and FSRA’s Unfair and Deceptive Acts and Practices (UDAP) Rule.

Specifically, the review will provide further insight into the:

  • Size and scope of the MGA market in the Ontario P&C Insurance sector
  • Due diligence insurers undertake in the selection of MGAs for outsourcing arrangements
  • Insurer oversight practices for the functions they outsource to MGAs
  • MGA business practices that may create a higher risk for consumer harm

The review will assist in identifying any potential conduct issues and compliance gaps in P&C Insurer-MGA relationships in support of an informed, evidence-based approach to conduct supervision. FSRA is committed to transparency and details of the supervision plan are set out in the pages below.

Introduction

The Financial Services Regulatory Authority (FSRA) is an independent regulatory agency created to improve consumer protection in Ontario. FSRA promotes high standards of business conduct in the sectors it regulates, including Property & Casualty (P&C) Insurance. FSRA is committed to fair treatment of P&C Insurance customers through efficient and effective regulation that protects the rights and interests of customers and promotes public confidence in the sector. 

The past several years have seen challenges in the P&C Insurance marketplace. The pandemic and ongoing economic pressures have, in some cases, resulted in stricter underwriting discipline and a decreased risk appetite for insurers. This has created challenges for customers in obtaining certain insurance coverages. Managing General Agents (MGAs) play an important role in the P&C Insurance market by providing access to specialized areas of insurance coverage. MGAs often develop unique insurance products for complex risks, creating capacity that would not otherwise exist in the market.

During its preliminary market intelligence gathering, FSRA noted that P&C MGAs are intermediaries that connect brokers with insurers and do not typically deal with the public. P&C MGAs act on behalf of insurers by performing traditional insurance functions outsourced by insurers. These functions may include developing products, pricing, transmitting applications, underwriting, collecting premiums, adjusting, and administering claims. In these ways, P&C MGAs may act like insurers, but they do not assume capital risk, which remains the responsibility of the insurer. P&C MGAs are compensated via commissions and fees. The exact number of MGAs operating in Ontario is currently unknown[1]. 

FSRA licenses and oversees the conduct of P&C Insurers in Ontario to ensure the way insurer functions are carried out results in fair outcomes for customers and compliance with regulatory requirements. Despite performing some of the same functions as insurers, MGAs are not licensed as insurers in Ontario. It should be noted that some MGAs in Ontario are licensed with the Registered Insurance Brokers of Ontario (RIBO) to meet licensing requirements in other provinces/territories.

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. Outsourcing and/or delegating functions to an MGA does not discharge insurers of their regulatory obligations. FSRA’s review of insurers will focus on the alignment of business functions with fair treatment of customers principles and compliance with obligations under the Insurance Act. 

Observations to date

Outsourcing to P&C MGAs 

In fulfilling its mandate of ensuring fair outcomes for customers, FSRA has been meeting with stakeholders and gathering market intelligence to better understand the activities performed by MGAs within the P&C Insurance sector and the potential risks of consumer harm resulting from insurers outsourcing those activities. Through the preliminary work, FSRA has identified a range of functions outsourced to P&C MGAs.

Insurer functions outsourced to P&C MGAs may include:

  • Developing policy wordings and designing insurance programs.
  • Underwriting knowledge and expertise in specific lines of business.
  • Providing quotes to brokers.
  • Accepting applications and binding coverage.
  • Issuing policy documentation.
  • Receiving policyholder premiums from brokers, holding funds in trust, and remitting premiums to insurers.
  • Adjudicating claims or examining claims being handled by a Third-Party Administrator/Independent Adjuster.
  • Providing brokers with notices of renewal, non-renewal or cancellation.

The activities performed by P&C MGAs vary and include functions throughout the life cycle of the insurance product. The conditions, scope, and limits of the authority granted by an insurer to an MGAs are typically governed by a contract between the two. 

Risk of consumer harm

Insurance companies are regulated and supervised by FSRA. While MGAs perform certain insurer functions, MGAs are not licensed in their capacity as MGAs (noting that certain MGAs are licensed as brokers) and are neither regulated nor supervised in the same manner as other P&C Insurance participants such as insurers, agents, and adjusters. The activities performed by MGAs on behalf of insurers may lead to outcomes where customers are not treated fairly. This risk is increased if insurers are not diligent in the selection of the MGAs they do business with or do not have sufficient oversight over their MGAs’ activities. 

Through stakeholder engagement and market intelligence, FSRA has identified the following areas of potential consumer harm when insurers outsource functions to MGAs. 

Potential consumer harms associated with P&C MGA activities 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.

Fair treatment of customers

In 2020, FSRA issued new guidance confirming the use of Guidance: Conduct of Insurance Business and Fair Treatment of Customers (Guidance)[2] (FTC Guidance) to supervise the conduct of insurers and other entities FSRA regulates under the Insurance Act (Ontario). FSRA assesses whether such entities follow the Guidance in setting and maintaining business policies and practices that are effective in ensuring fair treatment of customers. In addition, FSRA administers its Unfair and Deceptive Acts and Practices (UDAP) Rule[3] which, pursuant to s. 439 of the Insurance Act, prohibits any person, which includes insurers or anyone they have authorized to act on their behalf, such as an MGA, from engaging in any unfair or deceptive acts or practices.

Considering the potential harm to customers, FSRA’s review will focus on the controls and practices insurers have in place to ensure the requirements under the Insurance Act, its regulations and the UDAP Rule are met when insurer functions are outsourced to P&C MGAs. FSRA expects that outsourced activities do not hinder the quality of services or jeopardize an insurer’s ability to achieve FTC. 

Review of P&C Insurer – MGA Outsourcing Relationships

To build on our preliminary work, FSRA will review P&C Insurers licensed with FSRA to better understand the MGA marketplace and outsourcing relationships between Insurers and P&C MGAs. The review will focus on four areas: 

  • Insurer distribution through MGAs, including the size and scope of the MGA market in the Ontario P&C Insurance sector
  • Due diligence undertaken by insurers in the selection of MGAs for outsourcing arrangements 
  • Insurer oversight practices for the functions they outsource to MGAs
  • MGA business practices that may create a higher risk for consumer harm 

FSRA will take a risk-based, evidence informed approach that will allow us to target our resources on the practices/products that create higher risk for consumer harm. In particular, our work will focus on outcomes that demonstrate:

  • suitability of market participants in the sector
  • business practices that support fair outcomes for customers. 

The outcome of the review will inform the development of FSRA’s Market Conduct Supervision Framework for P&C Insurance and will further assist FSRA in assessing priority areas for supervision in the sector. 

FSRA’s market intelligence gathering to date has been informed by stakeholder engagement and consultation. For this review, FSRA will continue to work with industry and other stakeholders to gain a deeper understanding of insurer’s outsourcing arrangements with MGAs. FSRA’s new Non-Auto P&C Insurance Supervision Technical Advisory Committee (TAC) will be engaged on the Insurer-MGA Outsourcing Relationships review.

The TAC is comprised of senior members of industry and was established in December 2023. The TAC will offer industry expertise and insights into FSRA’s approach. The committee is an important part of FSRA’s stakeholder engagement process. Prior to launch of the review, FSRA will work with the TAC and other stakeholders to seek advice and feedback that will inform FSRA’s approach and ensure its outcome supports the fair treatment of customers. 

Conclusion

The P&C Insurer – MGA Outsourcing Relationships review underscores FSRA’s commitment to regulatory excellence and the fair treatment of customers. By adopting a risk-based approach, FSRA can dedicate its resources to areas representing the greatest potential harm to protect customers, build trust, and strengthen confidence in the insurance sector. This review of P&C Insurer activities will support high conduct standards and ensure compliance with insurance laws and FTC principles. FSRA is committed to transparency and the outcomes of this proactive supervision work will be shared to promote industry compliance with regulatory requirements and will be used to inform future supervision programs in P&C Insurance. 

The senior management and Board of Directors of insurers are responsible for the design, implementation, and monitoring of mitigation strategies to ensure customers are treated fairly. FSRA expects insurers to review this supervision plan, and other relevant publications, to ensure they are complying with the law and regulatory expectations. 

Your feedback is welcome

FSRA welcomes comments from stakeholders on this supervision plan. Your comments will help inform our current and future supervision priorities and will increase our understanding of the P&C Insurance sector.

[1] Canadian Association of Managing General Agents (CAMGA), a national trade association, represents approximately 68 P&C Insurance MGA’s. 
[2] Fair Treatment of Customers in Insurance
[3] Unfair or Deceptive Acts or Practices