Increasing compliance requirements add to MGA consolidation pressure

As regulatory oversight increases in the insurance industry, so too do compliance costs, straining the resources of smaller managing general agents (MGAs). The cost pressure could result in further industry consolidation, potentially impacting the relationship between MGAs and life agents.

The rush of MGA consolidation in the 2010s didn’t leave a lot of large regional MGAs left in Canada, said Kirk McMillan, president of Flamborough, Ont.–headquartered MGA Gryphin Advantage Inc. And persistent pressures to consolidate may further reduce their numbers.

When McMillan first joined Gryphin in 2021, the company was paying about $30,000 to $35,000 for a software system for compliance, licensing, contracting and client credit checks, he said.

Now, the system costs over $100,000.

“We have to have it. It’s the only way we can contract with most of our carriers,” McMillan said.

While Gryphin, with about 2,000 advisors, has the means to make that investment, smaller MGAs would struggle to do the same, McMillan said.

“If I’m one of the big guys … I can afford a chief compliance officer, I can afford to put supervisory controls in place and so forth. But if I’m medium or small, it could be onerous on my firm,” said Byren Innes, financial services consultant and managing director with Jennings Consulting Ltd. in Toronto.

Some carriers have already cancelled contracts with smaller MGAs, which now do business through Gryphin, McMillan said.

Heightened compliance is felt throughout the distribution chain. Insurance broker Zavitz Insurance & Wealth in London, Ont., has five advisors, and was dealing with compliance audits from three carriers in July, said vice-president Justine Zavitz.

“They’re digging through years of notes and paperwork,” she said.

Zavitz Insurance & Wealth has one compliance officer to handle the audits.

Brokerages and MGAs needed to consolidate to create economies of scale, Zavitz said. Hub International Ltd. bought Zavitz Insurance & Wealth in March.

It’s difficult to simultaneously grow and run a business, said Zavitz, who had bought the business from her mother, with whom she worked for 20 years. Zavitz said the Hub acquisition let her focus on her practice, and offered growth opportunities and the comfort of knowing her clients will be taken care of when she leaves the business.

MGAs acquired by carriers and larger MGAs will have access to the acquiring company’s legal, technology and compliance resources, making it easier to meet carrier compliance requirements, Innes said.

A lot of the compliance requirements fall at the advisor level, as advisors handle the paperwork for policy applications, Zavitz said. Advisors with Zavitz Insurance & Wealth can ask Hub compliance staff questions about how to fulfil policy application requirements, and greater access to Hub’s compliance resources may be available in future.

Also, if MGAs consolidate, they will be able to maintain a bigger shelf and provide more products to clients, Innes said — but at the risk of providing less personalized service to life agents.

“In the worst-case scenario, I may become a number,” he said. “I was a big fish in a small pond; now I’m a small fish in a big pond.”

Gryphin assigns a case coordinator to every life agent, but larger MGAs may find it difficult to do the same with their large number of agents, McMillan said. If an MGA stops focusing on smaller practices, agents will leave to work with different MGAs.

Life agents “want to feel like they’re being supported in their practice,” McMillan said. “We [at Gryphin] worry about it all the time; our firm is built on relationships and culture.”

Ontario-based BridgeForce Financial Group Inc. was acquired by Hub in 2023, and BridgeForce was the MGA of Zavitz Insurance & Wealth at the time. Zavitz Insurance & Wealth still has the same case coordinator as it had before that acquisition, Zavitz said, and she hasn’t experienced a change in service quality.

Innes noted that there’s growth potential in agents who sell relatively few policies during the course of a year, and larger MGAs can provide the support to help those agents grow.

Zavitz said her brokerage got a new portal after Hub acquired BridgeForce, with more educational resources for advisors such as webinars and training programs.

“If you’re a new advisor, or even an experienced advisor that just needs a little bit of tweaking on your processes, it would be a great resource to tap into,” she said. “It’s something that was not always readily available to us before.”

Some recent MGA acquisitions were by carriers instead of other MGAs. For example in 2022, Empire Life Insurance Co. bought and amalgamated six firms (previously BridgeForce companies) into one MGA, and Desjardins Group acquired IDC Worldsource Insurance Network Inc. (along with Worldsource’s investment and mutual fund dealers) for $750 million.

MGAs can grow so large that only life insurance companies or venture capital firms can afford to buy them, Innes said. “They got so big they couldn’t sell to the guy down the street,” he said.

Zavitz said she’s concerned vertical integration could create a conflict of interest where agents will be incentivized to sell products from the carrier that owns their MGA. “I don’t love the feel of a carrier owning an MGA because it gives them too much control,” she said.

As for the sellers, while growing MGAs may look for strategic partnerships with other medium-sized MGAs, retiring founders of smaller MGAs may look for the best value they can get instead of what’s right for the company’s future, Innes said.

“Just write me the check,” he said. “It is a one-time deal, so I better get everything I can.”