Changing MGAs is a headache. “It’s probably the area of our business that has become more complicated over the years,” says Terri DiFlorio, president of Hub Financial.
The process moves much slower when the insurers involved have formal transfer rules for the transaction. Most recruiting MGAs and insurers check into the broker’s background and financial stability to make sure he or she can fulfill any financial obligations.
When the broker starts writing business with the new MGA, commissions remain in a suspended account until all parties have completed their checks. “So the client is still looked after,” explains Rick Forchuk, vice-president of Retail Insurance Distribution at Kingston-based Empire Life.
According to established business practice, the recruiting MGA first checks for whether the broker has outstanding financial obligations, such as chargebacks, at the old MGA. A chargeback occurs when an insurer has overpaid commissions or when customers cancel policies.
When the insurer cannot collect from the broker within a stipulated period, most contracts provide that the debt rolls up to the MGA with whom the broker wrote cases when the debt was incurred.
In such instances, the insurer withholds commissions until the broker has cleared the debt. Hub insists the debt be addressed, DiFlorio says. It recently informed a broker it would not sign him until he addressed his debts with the old MGA. Hub called the old MGA to explain the broker would provide post-dated cheques.
The recruiting MGA and insurers also do background checks and may check all former MGAs. In British Columbia, these checks became mandatory in January. “We have said to MGAs that they have a certain responsibility to make sure they [understand] who they are contracting with,” explains Gerry Matier, executive director of the Insurance Council of B.C.
The checks include the broker’s personal financial status and debt-servicing record. Companies that screen insurance professionals include Greengrass Group, Quality Underwriting Services, and First Financial Underwriting Services. The check would also examine the broker’s compliance record for any substantiated consumer complaints.
The recruiting MGA typically pays the losing MGA five times the value of service fees on policies transferred, and 0.25% of the investments under management for the investment products portion of the book of business.
“The ongoing revenue stream is taken into consideration [plus] a multiple [to determine] the purchase price,” DiFlorio explains.
When the MGAs cannot agree on the amount, the insurer may become involved. Empire Life, for example, asks the two MGAs to reach agreement within 30 days and then move its block of business. It then asks the recruiting MGA to pay the standard amount to the losing MGA for the value of the block of business.
In some cases, the losing MGA will keep the block of business and the broker will build a new book of business at the acquiring MGA, Forchuk says. Sun Life Financial provides reports to both MGAs that support its purchase price calculation, according to a statement from David Gray, the company’s vice-president, Wholesale Distribution, Individual Insurance and Investments.
The administrative side of the transaction can become cumbersome, since the decision to change means writing up an entirely new set of contracts, even when the broker has existing contracts with insurers.
“All the carriers have their own specific paperwork,” says Jackie Moulton, an insurance broker at Ottawa-based Coughlin & Associates, which is currently consolidating its MGA relationships. That has meant drawing up new contracts with insurers with whom the company already has contracts.
Moulton, a 30-year veteran of the industry, argues that a simplified document would expedite the transition and questions the need to repeat steps such as credit checks. Moreover, making the move sometimes requires obtaining a new broker code from each insurer, a headache that could be resolved with permanent codes.
As insurers set up formal transfer rules, MGAs hope to work with them to simplify the process, DiFlorio explains. The Canadian Council of Insurance Regulators is also expected to table a report by March 23 that may address these headaches.
Al Emid is a Toronto-based financial journalist.