Willis' MGA agreement with NU is the start of something much bigger

Willis’ signing of a long-term managing general agent deal with Norwich Union (NU) is the latest evidence that brokers and insurers are responding to pressure to drive up margins by finding more efficient ways to conduct their business.

It is also a sign that the larger brokers, often slated by smaller competitors as being unable to adequately service their SME clients, are committed to not only defending their portfolios, but maximising their returns in that critical space.

In November, Willis declared that it needed to “fundamentally change [its] operations model to transform the SME proposition.”

Enter the MGA, which provides pricing, underwriting, policy servicing and claims handling on behalf of insurers for a fee and share of underwriting profits. In essence, it enhances already profitable lines of business to the benefit of both parties.

With insurers exposed both on rates and commissions - and in possession of capacity that must be put to use - paying a higher rate of commission for the services bound up in an MGA offering is a great deal more palatable than the prospect of losing the business outright; and, as any insurer or broker will say, provided renumeration reflects the service that is being provided, everyone wins.

“Though MGAs are typically associated with smaller, non-complex risks, Willis plans are much bigger than that

Willis is certainly bullish about the potential for its MGA platform to generate returns. Through reducing the cost of placing small business, the broker expects revenues from its MGA of around £14m next year, and double that sum in 2010. By 2011, it hopes to generate profits of £13m on revenues of over £45m. In addition, it says the move will “free up time for selling activities to further increase revenue”.

This appears to be a key consideration. Though MGAs are typically associated with smaller, non-complex risks, Willis’ plans are much bigger than that. It will be interesting to see when it makes the move to underwrite larger risks, and how the MGA model could benefit members of its burgeoning network proposition.

Poacher turned gamekeeper
There is a danger, however, in passing the pen. in the case of Willis and NU, the move has more than a tinge of irony about it.

Towards the end of his tenure as broker boss at RSA, Brendan McManus played an instrumental role in pulling out of the insurer's blockbuster three-year binder agreement with Primary after just one year.

Amid suggestions that the move was the result of sloppy underwriting by the broker, NU promptly picked up the tab - and extended the deal. A few months later, McManus left RSA to join Willis. Now, six months after the company announced it would be looking to develop its MGA business on a global scale, he finds himself linking up with NU.

“As any insurer or broker will say, provided renumeration reflects the service that is being provided, everyone wins.

Given that Willis’ commissions are already among the highest in the market, and McManus' extensive experience, it would be surprising if he has not negotiated top dollar this time around.

It would also be surprising if he has not already inked a deal with RSA.

This latest development in the increasingly blurred relationship between insurers and brokers ceratinly appears to be a permanent one; a point reinforced by the 17-year average lifespan of Willis' MGAs in the US.

What will be most interesting is not who enters into MGA arrangements over the coming months, but who does not and, indeed, how they can possibly afford not to.