Once snubbed by the industry, MGAs are increasingly seen as a good way to get high-volume, low-value business. But to survive, they must bring skills and good returns that insurers cannot replicate in-house
Managing general agents (MGAs) are a bit like Jonathan Ross. They may get up the collective nose of the insurance fraternity, but despite the death knell being sounded for them many times over the last four years, MGAs, like the television presenter, are still here, winning work and, right now, positively flourishing.
Suddenly, MGAs have gone from industry pariah to industry messiah, and even former critics are happily availing themselves of their services.
Part of this sea change in opinion can be traced to the dramatic shake-up of the post-credit crunch financial landscape, both in terms of the amount of money in the system, and the regulatory framework that financial services companies now operate in. But make no mistake, MGAs are here to stay.
The recently formed Managing General Agents’ Association (MGAA) estimates that MGAs are currently underwriting about £5bn of the UK general insurance market’s annual £47bn of premium income.
Lloyd’s says about 30% of its premium comes through the 2,500 MGAs it uses globally, 701 of which are in the UK.
“MGAs are key to our strategy,” Lloyd’s head of delegated authorities Peter Montanaro says.
“It’s an interesting change from a few years ago, when it’s fair to say people were turning their noses up at delegating authority, giving the pen away. Now there is an acceptance that it’s the way to get good quality, high-volume, low-value business.”
‘The company market is in denial abut giving their pen away, when in fact they do it all the time. They will do it if it suits them’
Reg Brown, MGAA
What works for Lloyd’s, though, doesn’t work for everyone. When it comes to the big primary insurers, only about 10% of their business is done through MGAs. And while there is undoubtedly a change in how these insurers see MGAs, it’s hard not to get the impression that the current relationship is a marriage of convenience - not so much made in heaven as forged on the altar of self interest.
”I’m not sure insurers have moved towards supporting MGAs,” MGAA chairman Reg Brown says. “Lloyd’s has always had a delegated underwriting thirst and desire to continue expanding it. The company market, on the other hand, is in denial about giving their pen away, when in fact they do it all the time. Insurers don’t boast about doing it, but they will do it if it suits them.”
And caught in the grip of the worst recession in living memory, it appears to be suiting them more and more.
Against a backdrop of failing investment returns, thoroughly depleted reserves, and increased claims in key markets, insurers need to make a profit from underwriting. The financial crisis has therefore provided a fertile environment for MGAs, which take much of the administrative load from insurers at a time when cutting costs is paramount and give them access to new profitable markets.
“There is a bigger focus on returns in the current market,” says Arista chief executive Charles Earle. “Clearly it is a problem that insurers are not making the investment returns they were used to. I’m not sure there is a direct link between the acceptance of MGAs and the financial crisis, but there is no doubt that the need to be more cost efficient is a driver.”
Another key driver is the regulatory regime that has grown out of the implosion of the financial system. Increased emphasis on oversight and supervision has played a significant part in establishing a robust MGA model in recent years, weeding out the weaker and less well-run companies.
“The governance landscape has changed for insurers, and that has driven increased levels of discipline and control,” says Allianz Commercial director of underwriting and technical Neil Clutterbuck.
“Those MGAs that have survived increased regulation have a solid business base. And without that governance, along with returns and specialist market knowledge, insurers wouldn’t be interested in MGAs.”
The decision in 2005 to take the regulation of MGAs under the control of the much-maligned FSA was another important milestone in the acceptance of MGAs.
CFC Underwriting managing director David Walsh says: “When the sector came under the remit of the FSA, it made a difference in that we became subject to the same regulations as insurers and brokers. There’s no doubt that the trend towards more professionalism within the sector in recent years is partly down to legislation.”
Montanaro adds: “Compliance is essential to make sure these businesses survive and continue to produce good business for us. Lloyd’s sometimes gets criticised for some of the compliance we expect from MGAs, but the reality is that it’s only put in place where necessary, to protect the market. Having said that, Lloyd’s recognises that we have a duty to work with our MGAs to make the job of meeting compliance as painless as possible. “
The adoption of state-of-the-art IT systems by many MGAs has also played a part. “The success of MGAs depends on being quick and responsive to the market, often concentrating on niche business,” explains managing director of SSP’s insurer division, Steve Lathrope. “Flexible technology is allowing them to do this, filling the gaps left by less agile businesses and providing insurers with a route to trade through, rather than trying to do it themselves directly.”
Lathrope’s view is echoed by Montanaro. “MGAs need to have good systems, particularly the smaller ones, or they will end up being pushed down the consolidated route,” he says.
An unnecessary stage?
But while MGAs are now better run, and better regulated - both by the regulators and individual insurers - the model remains the same. The risks are retained by the insurance companies, and the claims are ultimately paid by them. This has led to accusations they are an unnecessary middleman in the industry.
“MGAs do add to costs, and yes, they also lengthen the chain in insurance,” concedes Brown. “But look at what insurers get in return. In most cases MGAs are where the underwriting expertise resides, and MGAs also have access to markets that insurers cannot access.”
Ink Underwriting managing director Mike Smith insists insurers get a very good deal from MGAs, gaining access to markets without any of the fixed costs. “We get 6,000 enquires a month, and through those we filter the good risks from bad, provide the quotes, convert them, collect the money and issue documentation. All that is done at virtually no cost to the insurer. The commission that’s paid to the MGA is there to cover those costs, and frankly that is a significant saving for insurers,” Smith says.
In simple terms, if an MGA provides an insurer with a good return it will have a place in the insurer’s distribution model. Conversely, if an MGA fails to provide good returns, insurers will abandon it.
Clutterbuck succinctly sums up the insurer’s perspective. “It comes down to what area the MGA targets and the skills it brings to that market. If we can’t replicate that in-house then it’s obviously attractive to work through an MGA. But, of course, MGAs have to be able to compete with the costs of an insurer acting as a primary insurer. If the cost equation is greater than the cost a primary insurer would incur, then they are unlikely to find the capacity of the capital. MGAs are an accepted part of the distribution landscape now, but they have to perform.”
It seems, despite their current success, MGAs will remain under intense scrutiny. But as they become more established in the market, insurers will have a good yardstick, in terms of a history of data and claims statistics, to measure their performance. The clear consensus is, like them or loathe them, MGAs will survive.
Market views: What does the future hold for MGAs?
Mike Smith, managing director of Ink Underwriting:
“My principal worry for the future is that insurers with excessive capacity will start to lack the discipline required to select the right MGA. The fear is that some insurers will end up giving their pen to a rogue MGA that sets up a business in a niche area and decimates the marketplace for 18 months with unsustainable prices.
“When the claims start to come in, the carrier will of course realise it’s made a mistake by releasing the rates it has and pull the facility. But the problem is in the meantime you’ve driven down the premium in that marketplace, and created an expectation for clients that premiums will change, and that’s all due to the insurer failing to do enough due diligence at the outset and releasing inappropriate rates and covers.”
Karen Smith, technical director of UK General:
“MGAs will continue to increase but they won’t, perhaps, be the MGAs of old. I think the MGAs themselves needed to develop and move with the times. When Primary was first an MGA, for them and the insurers it was about distribution entirely. The insurers saw an opportunity for growth and it was all about distribution. But now the insurers and obviously the MGAs see the differences in product, reaching different markets.
“There’s also the potential in certain instances for the MGAs to carry some of the risks themselves, or at least taking some of the share of the underwriting upside and downside. For me, that will be the future of the MGA, taking the share of that underwriting risk in some manner. It may not be a quota-share or co-insurance, it might just be a sliding share on commission.”
Peter Montanaro, head of delegated authorities at Lloyd’s:
“The nature of Lloyd’s business means that certain large risks and specialised business will always be written in the Room, so there is a limit on what percentage of the overall book would be done through MGAs. Consequently, I don’t think that MGAs’ overall share of Lloyd’s business will go up much beyond the 30% that we are at now. Our strategy going forward is to protect what we’ve got and continue to profitable business.
“I’m also pleased the MGAA has launched, and Lloyd’s thoroughly supports it. I think it will be a good advocate for the MGA sector when it comes to legislation and liaising with regulators in the future.”
Neil Clutterbuck, director of underwriting and technical with Allianz Commercial:
“Established MGAs will continue, but I don’t get the impression that we’ll see a significant expansion of MGAs. If anything, we may see a further contraction over time. Insurers will want to continue investing capital for themselves and taking underwriting positions themselves. We look to balance our portfolio in terms of distribution.
“The success of any MGA is driven by data, knowledge and performance and, as such, it is only as good as its last game. So in future, there will remain a constant pressure on MGAs to ensure that they are deploying whoever’s capital they are using in the most cost-effective, well-controlled way possible.”
Brian Russell, chief executive of APC:
“Within the next 20 years or so it’s likely that insurers will seek to create their own MGAs. They are buying them up at the moment, so it’s likely that more insurers will have their own in-house MGA divisions. We’re approached regularly. Brokers are buying MGAs too. We still need to improve understanding about MGAs within the insurance industry, and that’s what the MGAA will have an important role in doing. Too many insurers still insist MGAs are wholesalers and that simply isn’t the case - we are underwriters, and underwriters that give a good service to the industry.”
Charles Earle, chief executive of Arista:
“The increased regulatory burden will undoubtedly make life harder for small businesses such as MGAs. But I don’t see the sector either shrinking or growing beyond where it is now. It’s pretty straightforward for an insurer or broker to buy an MGA, as you don’t have the legacy issues you might have with buying an insurer. Insurers that want to grow their top line will continue to buy volumes and MGAs are a simpler and less risky acquisition than buying another insurer’s balance sheet.”
David Walsh, managing director, CFC Underwriting:
“There is always a suspicion that successful MGAs will be sold to a carrier, as there is an obvious arbitrage over the underwriting profit. But I believe that there is room for more large MGAs that have the benefit of scale, efficiencies, IT and know-how, and who can therefore deliver the MGA benefits very well to carriers and brokers. There may well be some consolidation, since there are relatively few large MGAs and a larger number of small MGAs, often with a deep and valuable knowledge about one or two product lines. And more brokers seem to be entering the MGA market as well.”
Talking points …
● General insurers still lack the appetite for MGAs shown by their Lloyd’s brethren – is this changing and, if so, how quickly?
● Insurers have relied more on MGAs since the beginning of the financial crisis, as the agents take much of the administrative burden from insurers. Would a healthier financial environment equal a decline in MGAs, or is the model here to stay?
● Some MGAs charge high commission levels for the business they handle – is this fair and does their service warrant it?