TruStar aftermath sees P&C industry focus on due diligence, governance
Good governance, compliance, and due diligence between brokers, managing general agents (MGAs), and insurer partners are essential to avoid another TruStar situation, panellists said at the National Insurance Conference of Canada (NICC) last Thursday.
“What needs to be considered is the internal governance procedures and due diligence procedures [of] anyone who’s dealing with an MGA,” said Stephen Stewart, president and CEO of Stewart Specialty Risk Underwriting. “MGAs themselves need to have rigorous internal governance procedures that are transparent and can be shown to their partners, brokers and carriers alike.
“All of the stakeholders in this segment need to know what the others are doing, and they really need to be diligent. I think that’s the nut of the problem here. You know, it always goes toward, ‘What could prevent this from happening again?” Have you thought about regulation? But let’s start with governance, and let’s start with due diligence.”
Last December, specialty MGA TruStar Underwriting filed a civil lawsuit against its former CEO. TruStar’s statement of claim alleges a misappropriation of funds. The company has filed for $6 million worth of damages.
The allegations have not been proven in court, no criminal charges have been filed, and the former CEO’s lawyers have not returned Canadian Underwriter’s requests for comment.
TruStar has ceased operations and is currently in receivership. Many brokerages and insurers are working hard to make sure those who had paid premiums to the MGA are covered. Regulators have responded thus far with vows to review their own rules for MGAs, and a promise to publish new guidance for industry players working with MGAs.
MGAs play a unique role in the commercial insurance industry, acting as intermediaries between retail commercial brokers, who are public-facing, and insurance companies. MGAs have limited authority to write policies on behalf of carriers, which provide capacity to cover claims. MGAs distribute the policies to commercial brokers, who then sell the policies to their clients.
Brokers’ and insurers’ perspectives
In the aftermath of TruStar’s receivership, P&C insurance industry players now need to work together to promote trust in the MGA sector, the panellists said.
“I think we all have a role to play, all of the stakeholders in the compliance ecosystem, if you will,” said NICC panellist Sean Duggan, senior vice president of special risks and claims at KRGinsure. He is also a board member of the Toronto Insurance Council, a national association representing commercial brokerages.
“I also think it’s incumbent upon us as brokers to partake in that rigorous due diligence. We need a codified due diligence protocol that’s defensible, that’s multifaceted, [when] you are looking at the compliance and procedures and protocols on the MGA side. Are there insolvency issues? How is the trust account managed? Who are the carriers that are providing capacity support, or capacity partners, for example?
“So, I can tell you…as a broker, there’s been some outreach from the MGAs, just in terms of their underwriting managers and [executives] to restore that confidence, saying, ‘Hey, this is an anomaly. The system works.’
“But at the same time, I can tell you, speaking from our perspective [as commercial brokers], and having a seat at the table at the TIC, it’s being taken more seriously and more rigorously than ever before.”
Duggan noted the TIC has issued guidance to brokers working with MGAs.
Insurers also have a role to play in conducting due diligence with their MGA partners, said Tammy Parris, assistant vice president of corporate underwriting at HSB Canada.
“We’ve always been very focused on making sure that due diligence was done in advance [of partnering with an MGA],” she said. “So, when we start working with an MGA, if they show interest in working with us, if we notice that there’s something we can help them with, we do have a fully documented process where we have forms that we fill in, we sit down and talk.”
Parris suggested trust is an essential element of giving an MGA underwriting authority. And whether or not an organization can be trusted means doing some due diligence and asking other players in the P&C insurance industry about an MGA’s credibility and trustworthiness.
“A lot of us have been in this industry for quite a while, right?” she said. “We have some intel. We know people. We’ve worked with each other; we’ve worked against each other.
“And I think one of the things we have to recognize is that, sometimes, if you know a player on the other side and it’s not a right fit, then it’s not a right fit, right? You don’t have to go ahead with that deal. You can say ‘This is not the right fit for us right now. We’ve got something else going on.’ And I expect the same from the MGA [to say to a carrier]: ‘You guys aren’t the right fit for us. We have a better solution.'” she said.
“I think we as insurance companies need to continue to have those relationships with the MGAs we have. We can’t take them for granted. We’ve got to keep in touch with them. We have to do constant due diligence checks.”
