Are boundaries blurring as increasing numbers of MGAs seek to hold their own risk? Insurance Times asks the experts whether MGAs are stepping on insurers’ toes…

WE ASKED: Should MGAs carry their own risks? 

Harry Franks, chief business development officer at Zego

Harry Franks

The answer will be different for every MGA and very much depends on the nature of their business.

At Zego, we wanted to do something novel to look at rating factors and pricing in a genuinely different way - getting our own insurance licence was a crucial first step. This meant we would carry some risk, creating and selling our own policies.

Although we still work closely with other insurers, the licence has given us more autonomy and made us slightly less dependent on external partners. However, this isn’t an easy route, not least because gaining a licence can be costly and time-consuming, potentially taking several years.

For an MGA to carry its own risk, it must fully understand its customers and be able to price risk in the right way. You’re putting your money where your mouth is, so you have to think more like an insurer and less like a broker, focusing more on the quality of risk than the volume of sales.

A small company can’t afford to get this wrong as one large claim could badly hurt the business. In this sense, carrying risk is probably only worthwhile and sustainable as a strategy if the organisation plans to scale; not only because of the need to absorb potential losses, but also because it will require new expertise and will have to form and sustain new relationships with reinsurers.

Nick Mohan

Nick Mohan, joint managing director at Jackson Lee Underwriting

The market has seen some movement to MGAs carrying their own risk. Insurtech MGAs, for example, carry some of their own risk, but it is still early days and often is only a small percentage of overall capacity.

More commonly, challenges for MGAs arise when the capacity supporting the MGA suffers poor experience or their appetite diminishes. The MGA is forced to look at the performance of its own portfolio and either look for alternative partners or put forward a business case for participating in the risk themselves. ’Skin in the game’ is often mentioned by insurers when engaging in discussion around capacity.

The attractiveness of the MGA model to an insurer is the expertise it has in its chosen markets, and the concern any insurer has is what happens if things change and performance by the MGA is not as expected. Well managed MGAs that understand their product may be minded to take ’skin in the game’. Participating in the risk will help in maintaining underwriting support with capacity providers.

Either way, the MGA market is thriving. The MGA model offers brokers the opportunity to access products where a direct agency with an insurer may require premium volumes that the broker can’t deliver, and that symbiotic tripartite relationship and proven successful distribution model isn’t likely to change anytime soon.

Marco Del Carlo

This depends on what is meant by ‘carry their own risk’. If this means should MGAs set up a risk-carrying vehicle, then the answer is no.

From a regulatory perspective, MGAs are insurance intermediaries rather than risk carriers, so cannot legally assume underwriting risk in their own right. MGAs can set up a risk-carrying vehicle, but then the business is no longer a MGA, but a MGA and a risk carrier.

If ‘carrying their own risk’ means should MGAs be penalised where they are delivering underwriting losses to capacity providers, then the answer is yes. Typically, MGAs earn an underwriting commission on business written and a profit commission on underwriting profit delivered.

To encourage MGAs to underwrite for profit rather than volume, the contractual relationship between MGAs and capacity providers may include slider commission structures, commission clawbacks or profit commission deficit carry-forward clauses, all of which serve to limit the commissions payable to MGAs where underwriting losses emerge.

MGAs also carry the risk of capacity withdrawal or curtailment. There are several instances of MGAs that have folded due to loss of capacity and many MGAs have had to cut staff because their capacity was restricted. This risk of capacity loss provides a strong incentive for MGAs to underwrite profitably in addition to contractual penalties.