The MGA model is evolving as market conditions change
Managing general agencies (MGAs) are big news. For some months now, the major composites such as Norwich Union (NU) and AXA have been publicly critical of the model, threatening to pull capacity. The effects are now starting to be felt, with Insurance Times recently revealing AXA’s withdrawal from Primary and NU’s potential withdrawal in the autumn. NU has also decided to stop providing capacity to Ink, owned by consolidator Giles, from the end of this year.
MGAs flourished in the soft market because they were a means for insurers of widening distribution and gaining market share, even at the expense of profit. They offered the major generalist insurers a route to niche, specialised business and canny brokers saw an opportunity to up their commission levels. Many seized the chance.
But as the market hardens and the economy falls into recession, the big insurers have little motive to back the model. Many MGAs were making a marginal underwriting profit – often because of high commission levels – and this can quickly fall into a loss. The major insurers are now focused on underwriting profitability and are willing to sacrifice volume. Inevitably MGAs have been the first for the chop.
But the model is far from defunct. Innovative brokers still see opportunities. For instance, Giles has expanded its MGA and Oval is looking to launch one.
MGAs of the future are likely to take on one of two forms. The consolidators’ MGAs will work with another tier of insurers that remains only too keen to access their huge distribution capabilities.
The consolidators can still offer a lot of value to Lloyd’s and the London market, insurers such as Fortis that are developing their UK presence, and smaller insurers such as Groupama and Brit. But these insurers don’t have the capacity to handle as much of the consolidators’ books as NU and the other composites used to. Managing numerous small relationships would be cumbersome and inefficient for the consolidators. The answer? Bundle all that capacity into a MGA, push large amounts of their book through, cut costs through economies of scale, return a healthy profit.
There is a second model, favoured by some of the Lloyd’s brokers and global players. These use operating efficiencies – for example, technology – to cut costs and save the insurers money. These MGAs are not driven by high commissions but by taking a slice of the underwriting profit. The brokers that run them only get paid when their capacity providers make money. This model is likely to survive – with even AXA and NU maintaining a number of such relationships.
Managing general agencies were popular with insurers during the soft market
Major insurers are now withdrawing capacity as the market hardens
But there are still opportunities for MGA business models
MGAs can be attractive to smaller and specialist insurers
The remuneration model underpinning MGAs will also evolve