2023 10 - FSRA - Report - Market Conduct: Life and Health Insurance Agents - Life Agent Thematic Examinations: Tiered Recruitment Model MGAs - 43p

  • 2023 1003 - FSRA - Strengthening oversight and accountability of the life insurance sector - [link]
    • As part of FSRA’s enhanced sector supervisory approach, today FSRA is releasing two reports:
      1. 2023 10 - FSRA - Report - Market Conduct: Life and Health Insurance Agents - Life Agent Thematic Examinations: Tiered Recruitment Model MGAs  ---  [BonkNote]  ---  43p
      2. 2023 10 - FSRA - Report - Observed Practices in the Distribution and Sale of Universal Life Insurance  ---  [BonkNote]  ---  15p
  • Table of Contents
  • Executive Summary............ 3
  • Overview.................4
    • What are the outcomes of Life Agent Thematic Examinations: Tiered-Recruitment Model MGAs? .....5
    • Why are industry best practices significant? .................7
    • Why is the tiered-recruitment business model significant? ................7
    • Why is the sale of Universal Life policies significant? .....................7
    • What do consumers need to know?...........................8
  • Introduction.................... 9
  • Approach....................... 11
  • Outcomes ........................ 12
  • Contraventions of the Insurance Act................. 16
  • Best Practice Issues................... 20
  • Life Agent Questionnaire Responses............. 24
    • Full Time/Part Time Status and Outside Business Activities...........24
    • Concluding Comments: Full-Time/Part-Time Status and Outside
    • Business Activities.......................25
    • Insurers Represented..............................26
    • Insurance Products Sold – 2020 ..................28
    • Insurance Products Sold – 2021  ........30
    • Concluding Comments: Sale of Universal Life Insurance .........32
    • Concluding Comments: Policies Sold versus In-Force ............32
    • Commission Chargeback ....................33
    • Concluding Comments: Commission Chargeback.................34
  • Life Agent Interview Responses .......... 34
    • Life Agent Recruitment, Training and Monitoring.....................35
    • Concluding Comments: Life Agent Training and Monitoring ..........41
  • Conclusion.................... 42
  • (p) - The Financial Services Regulatory Authority of Ontario (FSRA) has observed sales practices by a segment of the life and health insurance sector that creates substantial risk of consumer harm.
  • As detailed in this report, FSRA examined 130 life agents working for three managing general agencies (MGAs) that use a tiered-recruitment model.
  • The examinations found unacceptable levels of life agent non-compliance.
    • Specifically, 50 percent of the life agents examined were found to have contravened the Insurance Act.
    • We also observed other concerning practices that could lead to poor consumer outcomes, including:
      • failing to complete continuing education as required to maintain an insurance licence
      • not sufficiently disclosing to their customers the insurers they represent
      • not sufficiently disclosing to their customers how conflicts of interest will be managed
      • misrepresentation to FSRA
      • potential gaps in agent training and supervision
      • many instances where agents were not following best practices, including cases involving the sale of complex Universal Life insurance policies
    • As a result of the Insurance Act contraventions identified, FSRA took enforcement action against 65 life agents
  • (p4) - To promote FSRA’s vision of financial safety, fairness, and choice for Ontarians, FSRA published its Life and Health Insurance Agent Supervision Framework1 (the “Framework”) in March 2022.
  • The Framework tests and verifies life agent compliance with the Insurance Act (the “Act”) and its regulations, and alignment with Guidance: Conduct of Insurance Business and Fair Treatment of Customers2 (“FTC Guidance”).
  • In September 2022, the CCIR Cooperative MGA Thematic Review – Consolidated Observations Report3 (the “CCIR Cooperative MGA Thematic Review”) was published with respect to three MGAs that utilize a tiered-recruitment business model, namely:
    • Greatway Financial Inc. (“Greatway”),
    • World Financial Group Insurance Agency of Canada Inc. (“WFG”), and
    • Experior Financial Inc. (“Experior”).
    • The review found the subject MGAs lacked mechanisms to ensure consumers are treated fairly, and identified four main areas of concern:
      1. life agents were compensated based not only on their own insurance sales, but also on insurance sales made by the people they recruit. This business model could have motivated the recruitment of individuals who are not yet licensed and resulted in sales by many newly licensed life agents.
      2. training of life agents lacked important substance, rigour, and reporting mechanisms to ensure they understood and were able to serve customer needs.
      3. relatively complex products were sold by life agents without adequate oversight to ensure product suitability and fair treatment of  customers.
      4. insurers and MGAs performed minimal formal and proactive supervision of their life agents to ensure fair treatment of customers.
  • (p8) - Certain products may not be affordable to consumers, and certain product illustrations may rely on assumptions that are misleading or not relevant for the consumer.
    • When life agents are not subject to appropriate training and monitoring, this creates the risk that consumers are being sold products that the life agent does not fully understand and/or that provides the best compensation option for the life agent, which can lead to unfair outcomes for consumers.
    • When consumers are sold an unsuitable product that does not meet their needs or provide the outcome they anticipated (e.g., purchasing a life insurance policy the consumer understood to be an investment product), or the policy is unaffordable and lapses, the consumer loses the premiums paid into the policy that may have been otherwise invested.
      • In some cases, this can be a significant or total loss of all of the premiums paid towards the policy.
  • (p10) - FSRA determined that life agent-related oversight functions were delegated to the MGAs by insurers.
    • The MGAs then further delegated to downline life agents, which could potentially result in market conduct risk and consumer harm. 
  • (p26) - It should also be noted that the relative inexperience of the life agents contracted with the subject MGA’s may also be a factor in examination outcomes.
    • As described earlier, when Life and selecting life agents for examination FSRA used the MGA contract start date and number of years licensed with FSRA to capture the proportional characteristics of the life agents contracted with the subject MGAs.
    • Based on the datasets provided to FSRA, the life agents contracted with the subject MGAs had between 1 and 8 years of experience as a licensed life agent.
  • (p26-27) - Insurers Represented - The following data precisely reflects attested life agent responses to the electronic questionnaire, which was not cleaned or verified by FSRA.
    • In 2021, of the 46 Greatway life agents who completed the questionnaire, 31 (67percent) reported placing business with Ivari, 4 (9 percent) reported placing business with Industrial Alliance Insurance and Financial Services Inc., 4 (9 percent)
      responded as “Not Applicable”, 3 (7 percent) reported placing business with Equitable Life Insurance Company of Canada, and 3 (7 percent) responded “None”.
    • In 2021, of the 46 WFG life agents who completed the questionnaire, 26 (56 percent) reported placing business with Industrial Alliance Insurance and Financial Services Inc., 21 (46 percent) reported placing business with Equitable Life Insurance Company of Canada, 19 (41 percent) reported placing business with Ivari, 9 (20 percent) reported placing business with Manulife Assurance Company of Canada, 5 (11 percent) responded as “Not Applicable”.
    • In 2021, of the 27 Experior life agents who completed the questionnaire, 12 (40 percent) reported placing business with SSQ Life Insurance Company Inc., 11 (37 percent) reported placing business with Industrial Alliance Insurance and Financial Services Inc., 9 (30 percent) reported placing business with La Capitale Financial Security Insurance Company, 5 (17 percent) reported placing business with Humania Assurance Inc., 4 (13 percent) reported placing business with Foresters Life Insurance Company
  • (p28) - Insurance Products Sold – 2020 - The following data precisely reflects attested life agent responses to the electronic questionnaire, which was not cleaned or verified by FSRA.
    • In 2020, of the 46 Greatway life agents who completed the questionnaire, a total of 580 insurance policies were reported sold across all product types. Of total insurance policies reported sold, 461 were Universal Life policies (79 percent).
    • In 2020, of the 46 WFG life agents who completed the questionnaire, a total of 496 policies were reported sold across all product types. Of total insurance policies reported sold, 208 were Universal Life policies (42 percent).
    • In 2020, of the 27 Experior life agents who completed the questionnaire, a total of 259 policies were reported sold across all product types. Of total insurance policies reported sold, 105 were Universal Life policies (41 percent).
  • (p32) - Concluding Comments: Sale of Universal Life Insurance Universal Life insurance is a complex and specialized product that may not be suitable for many consumers.
  • Examination outcomes indicate that inexperienced life agents are predominantly selling Universal Life policies, notably:
    • in 2020, a total of 1335 insurance polices were reported sold across all product types. Of these sales, 774 were reported to be Universal Life policies (56 percent).
    •  in 2021, a total of 1582 insurance polices were reported sold across all product types. Of these sales, 900 were reported to be Universal Life policies (57 percent).
    • Examination outcomes demonstrate a high ratio of contraventions of the Act and failure to follow industry best practices.
      • FSRA is concerned that the insurers and MGAs captured in this report may not have effective oversight processes in place to manage potential risks to the consumer, and to demonstrate suitable sales, particularly in the case of inexperienced life agents selling Universal Life policies.
  • (p33) - Commission Chargeback - The following data precisely reflects attested life agent responses to the electronic questionnaire, which was not cleaned or verified by FSRA.
    • Of the 46 Greatway life agents who completed the questionnaire, 4 (9 percent) reported a total of $1,515.00 in commission chargeback debt.
    • Of the 46 WFG life agents who completed the questionnaire, 5 (11 percent) reported a total of $51,812.00 in commission chargeback debt.
    •  Of the 27 Experior life agents who completed the questionnaire, 1 (4 percent) reported a total of $52.00 in commission chargeback debt.
  • (p34) - Concluding Comments: Commission Chargeback
    • It should be noted that the commission chargeback data reported by the life agents examined (i.e., reversal of life agent sales commission due to policy revocation or early lapse) reflects all insurance product types reported sold (i.e., it was not delineated by product type), and was not confirmed by FSRA. Of the 119 life agents examined, 10 (8 percent) reported chargeback debt.
    • As it is not clear to FSRA how reported chargeback data aligns with the policies sold versus in-force data reported, FSRA will consider further review of life agent chargeback reported. FSRA acknowledges that several factors may impact the reason for commission chargeback.
      • That said, commission chargeback can be an indicator of unsuitable insurance products being sold to consumers.
      • Moreover, when a life agent is carrying chargeback debt, there exists the potential for a conflict of interest where the life agent may be incented to put their own interests ahead of their clients in order to make sales to pay back the debt, which can lead to unfair outcomes for consumers.
  • (p35) - Life Agent Recruitment, Training and Monitoring - During the interview phase of the examination program, the subject life agents were asked, “Does your MGA instruct or train you to sell products from a specific insurance company?”
    • Of the 46 Greatway life agents interviewed: 8 (17 percent) responded “yes”; 36 (78 percent) responded “no”; 1 (2 percent) responded “do not know”; and 1 (2 percent)
      responded “not applicable”.
    • Of the 46 WFG life agents interviewed: 3 (7 percent) responded “yes”; 41 (89 percent) responded “no”; 1 (2 percent) responded “do not know”; and 1 (2 percent) responded “not applicable”.
    • Of the 27 Experior life agents interviewed: 3 (11 percent) responded “yes”; 21 (77 percent) responded “no”; and 3 (11 percent) responded “not applicable”.
  • (p36) - During the interview phase of the examination program, the subject life agents were asked, “Does anyone monitor/supervise your business activities/sales as a life agent?”
    • Of the 46 Greatway life agents interviewed: 34 (74 percent) responded “yes”; 11 (24 percent) responded “no”; and 1 (2 percent) responded “not applicable”.
    • Of the 46 WFG life agents interviewed: 25 (54 percent) responded “yes”; 16 (35 percent) responded “no”; 4 (9 percent) responded “do not know”; and 1 (2 percent) responded “not applicable”.
    • Of the 27 Experior life agents interviewed: 21 (81 percent) responded “yes”; 5 (19 percent) responded “no”; and 1 responded “do not know”.
  • (p37) - During the interview phase of the examination program, the subject life agents were asked, “How many individuals have you recruited?” as part of the MGA’s tiered recruitment business
    model.

    • The 46 Greatway life agents interviewed reported recruiting an average of 12 individuals.
    • The 46 WFG life agents interviewed reported recruiting an average of 16 individuals.
    • The 27 Experior life agents interviewed reported recruiting an average of 1 individuals.
  • (p38) - During the interview phase of the examination program, the subject life agents were asked, “Do you conduct any life agent monitoring/supervision for your down line life agents?”
    • Of the 46 Greatway life agents interviewed: 12 (26 percent) responded “yes”; 16 (35percent) responded “no”; and 18 (39 percent) responded “not applicable” due to having no downline life agents.
    • Of the 46 WFG life agents interviewed: 14 (30 percent) responded “yes”; 20 (43 percent) responded “no”; and 12 (26 percent) responded “not applicable” due to having no downline life agents.
    •  Of the 27 Experior life agents interviewed: 4 (15 percent) responded “yes”; 9 (33 percent) responded “no”; and 14 (52 percent) responded “not applicable” due to having no downline life agents.
  • (p39) - During the interview phase of the examination program, the subject life agents were asked, “Do you conduct any life agent training for down line life agents?”
    • Of the 46 Greatway life agents interviewed: 13 (28 percent) responded “yes”; 16 (35 percent) responded “no”; and 17 (37 percent) “not applicable” due to having no downline life agents.
    • Of the 46 WFG life agents interviewed: 13 (28 percent) responded “yes”; 22 (48 percent) responded “no”; and 11 (24 percent) “not applicable” due to having no downline life agents.
    • Of the 27 Experior life agents interviewed: 3 (11 percent) responded “yes”; 9 (33 percent) responded “no”; and 15 (56 percent) “not applicable” due to having no downline life agents.
  • (p40) - During the interview phase of the examination program, the subject life agents were asked, “Are you required to take any mandatory training?”
    • Of the 46 Greatway life agents interviewed: 40 (87 percent) responded “yes”; 5 (11 percent) responded “no”; and 1 (2 percent) response was “not applicable”.
    • Of the 46 WFG life agents interviewed: 37 (80 percent) responded “yes”; 8 (18 percent) responded “no”; and 1 responded “not applicable”.
    • Of the 27 Experior life agents interviewed: 21 (78 percent) responded “yes”; 4 (15 percent) responded “no”; and 2 (7 percent) responded “do not know”.
  • (p41) - During the interview phase of the examination program, the subject life agents were asked, “Does anyone check if you have completed the training offered?”
    • Of the 46 Greatway life agents interviewed: 37 (80 percent) responded “yes”; 1 (2 percent) responded “no”; 7 (15 percent) responded “do not know”; and 1 (2 percent) responded “not applicable”.
    • Of the 46 WFG life agents interviewed: 20 (43 percent) responded “yes”; 19 (41 percent) responded “no”; 6 (13 percent) responded “do not know”; and 1 (2 percent)
      responded “not applicable”.
    • Of the 27 Experior life agents interviewed: 15 (56 percent) responded “yes”; 9 (33 percent) responded “no”; and 3 (11 percent) responded “do not know”.
  • (p41) - Concluding Comments: Life Agent Training and Monitoring
    • When life agents are being compensated for the sales of individuals they recruit, this creates the potential for less focus on suitable recruits and suitable sales, which creates the potential for consumer harm.
    • In keeping with findings from the CCIR Cooperative MGA Thematic Review, interview responses provided by the life agents examined suggest there are gaps or inconsistencies with respect to the training and supervision delegated to the subject MGAs, their life agents, and their downlines.
    • Given examination outcomes with respect to contraventions of the Act and failure to follow industry best practices, FSRA is concerned the insurers and MGAs captured in this report may not have effective oversight processes in place to manage potential risks to the consumer, and to demonstrate suitable sales, particularly in the case of inexperienced life agents selling Universal Life policies
  • (p42-43) - Conclusion
    • Although the tiered recruitment model of the subject MGAs is not representative of all MGAs, the 12,775 life agents contracted with the subject MGAs at time of examination represented
      approximately 20 percent of the life agents licensed in Ontario. When life agents are being compensated for the sales of individuals they recruit, this creates the potential for less focus on suitable recruits and suitable sales, which creates the potential for consumer harm. The tiered recruitment model also appears to predominantly utilize part-time life agents. 
    • Of the 130 life agents captured in this report, FSRA took regulatory action on 50 percent, and 77 percent were cited with best practice issues. When considering these outcomes, it is important to note that the life agents selected for examination were not the subject of previous regulatory supervision actions, or otherwise risk-identified, and were representative of the entire group of life agents contracted with each of the subject MGAs.
      • Of the 115 life agents captured in FSRA’s 2021-22 Life Agent Supervision Report, FSRA took regulatory action on 56 percent, and 48 percent were cited with best practice issues. When considering those outcomes, it is important to note that the life agents selected for examination were the subject of regulatory supervision actions and risk-identified prior to examination.
    • FSRA expects MGAs that utilize a tiered recruitment model, and the insurers that conduct business with such MGAs, to have effective oversight systems in place to manage this risk, as well as any other potential risks to the consumer.
    • FSRA will also continue to refine its risk-based approach under the Framework to prioritize intelligence-informed life agent examinations. Life agent examinations based on the data and
      intelligence FSRA gathers through the Annual Statement on Market Conduct, consumer complaints, Life Agent Misconduct Reports (LAMRs), and open-sourced market intelligence will strengthen accountability and oversight of the end-to-end distribution chain, and support FSRA’s vision for consumer safety, fairness, and choice.