The advantages that MGAs can provide to the insurance sector in a rapidly changing world could help the industry stay relevant
Managing general agents (MGAs) are on the rise.
In terms of their relevance to the future of insurance and the premiums they underwrite, MGAs’ growth is accelerating as the insurance sector increasingly recognises the benefits these businesses can bring when it comes to accessing harder to reach, niche areas of the market.
In September this year, rating agency AM Best said that MGAs were gaining “a more prominent role with insurers” when it came to addressing more specialised coverage needs.
Its report, entitled Technology and talent drive managing general agent growth, also found that MGA premiums worldwide reached a record $60bn (£53bn) in 2021, up from $51bn (£45bn) the year before.
The agency estimated that the premium generated through the MGA market has doubled over the past decade, with the number of brokers within the industry declining as the number of MGAs grows.
The increased premiums MGAs typically generate has also seen a proliferation of new MGAs enter the market – the Managing General Agents’ Association’s (MGAA) chief executive Mike Keating told Insurance Times that he was seeing a new MGA launch “practically every week”.
As the MGA sector continues to grow, could these delegated underwriting firms become the flag-bearers for a revitalised insurance sector?
Speaking during his keynote speech at the MGAA’s conference in June 2022, Howden Group chief executive David Howden said that MGAs could “make the insurance market more relevant in the future” by innovating new products and allowing insurers to take risks.
He added that the insurance industry as a whole was in danger of becoming less relevant to the modern world because of the hit the sector’s reputation took during the Covid-19 pandemic and resultant business interruption claims.
So, what is driving the rise of MGAs and how can they help the insurance sector to innovate?
A large part of the rise of MGAs is their ability to respond to the concurrent growth of new risks, such as climate change and the growing threat of cyber attacks for businesses.
William Pitt, director of insurance research and consulting at insurance focused asset management firm Conning, explained: “The excess and surplus (E&S) segment of the broader insurance market has been growing very rapidly as many risks – notably property catastrophe, cyber and some liability risks that are affected by social inflation – are widely perceived as having become more volatile.
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“It is in the E&S market that MGAs are most active, targeting niches with specialty lines of business.”
MGAs are, fundamentally, a distribution channel for their capacity providers, offering larger firms access to markets that they may not have been able to reach previously.
Keating added: “If insurers want to access a specialist, niche market that their distribution can’t get to, then MGAs provide a level of competency to actually access that market.”
But what is it about the structure of MGAs that allow them to provide access to these niche markets where larger insurers can’t?
Tech and innovation
Across many areas of business, smaller startups that focus on technology, innovation and agility are thriving as the pace of change in markets accelerates and becomes more digitally driven.
MGAs often fit this startup model and are typically able to innovate more easily than the established legacy players in the insurance market.
Ben Smyth, chief executive of MGA Arma Karma, explained: “MGAs have far more freedom to test and fail than the big insurers and that allows the winners to rise to the top.
“MGAs are able to produce product and tech innovation that incumbents would struggle to replicate without jeopardising their existing portfolios of business.”
The smaller size of MGAs also allows them to respond more quickly to changing circumstances – akin to the old metaphor of a large tanker taking longer to turn than a smaller, more nimble boat.
Smyth added: “A smaller size and agility has always been an advantage for MGAs. We can shift quickly and respond to different developments in society with products – it’s just something the incumbents can’t effectively do.”
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Isabelle Clausner, vice-president and client executive for southern Europe at insurance technology firm Xceedance, echoed Smyth’s comments.
She said: “A lot of the drive in the growth of MGAs is from firms looking for a more agile and nimble way to access the market.
“One of the key differentiators for MGAs is technology. New MGAs are really embedding tech driven structures that are allowing underwriters to focus on underwriting and on being in the market instead of doing some of the more mundane tasks that underwriters still end up doing in traditional insurance companies.
“MGAs are challenging traditional insurance today.”
Lack of legacy
The back books of many larger insurers mean that they simply cannot afford to take the risks that smaller MGAs with no legacy books can take.
Phil Ost, head of personal lines at insurer Zurich UK, said: “MGAs can be more agile as, where they are often unhindered by legacy, they can provide a more rapid route for an insurer to deploy capacity into a new market.”
Smyth added that a lack of legacy business “has been a huge, huge factor” in the success of his business.
“It has allowed us to approach a totally new market with a clean slate and different positioning to really address its needs – that would have been near impossible for the large insurers to replicate,” he explained.
All of the factors influencing the success of MGAs are also benefiting insurers – while MGAs continue to grow and receive commission from their carrier partners based on their performance, insurers also benefit from the increased ability to sell to niche markets.
However, the rise of MGAs could also create some trepidation for insurers by tempting talent away from their firms.
Peter Horncastle, finance and compliance director at MGA incubator NuVenture, explained: “It’s people that drive the insurance market and MGAs are increasingly attractive for professionals in the market.”
Flexibility in working conditions, less red tape and more time spent underwriting with better technology are all factors increasingly influencing talent in the insurance sector to pool within MGAs.
“This is the sexy side of insurance in a lot of ways,” said Smyth. “MGAs are challenging the status quo and doing things differently to how they’ve been done in the past.
“Naturally, that’s a big attraction for some of the best brains in the industry – people want to be responsible for change.
“MGAs will dictate the future of insurance – they will choose the way it flexes, moves and develops.”
Keating agreed that the MGA market was particularly attractive to talented underwriters looking to leave what they saw as restrictive environments working for insurers.
He said: “You’ve got a bit of brain drain where entrepreneurial underwriters are leaving insurers because they’re frustrated with the labyrinth of decision-making and potentially overzealous compliance they face.”
Stoppers on growth
Despite the advantages MGAs can provide to insurers and other investors, an overreliance on outsourced underwriting could potentially present problems for insurers.
Pitt noted: “It makes sense for insurers to see MGA business as an important part of their overall business mix, but there are some risks in becoming over dependent on it.
“By working with MGAs, carriers are not nurturing skills in-house to develop target classes of business - unless of course they end up buying the MGA, as sometimes happens.”
Another element that could impact continuing MGA growth is the fact that these businesses draw their capacity from carrier partners.
They must, therefore, continue to function in close partnership with these insurers, which means there are natural limits on their potential to eclipse insurers.
Clausner added: “A lot of insurers, because they want to stay relevant in the market, want to stay relevant with their own brand and demonstrate their importance to the market - not just as capacity providers.”
Keating said there would always be insurers that didn’t want “to give away the pen” when it came to underwriting.
Fundamentally, the rise of MGAs is a net benefit to the insurance sector and the often innovative distribution and products they provide will hopefully allow the insurance sector to remain more relevant in a changing world.
Pitt concluded: “The key to a successful MGA relationship is a good alignment of interest between the carrier and the MGA.”
If MGAs and their carriers can secure these long-term business partnerships, the sky is the limit for the “sexy side” of insurance.