Andrew McGee says MGA deals are here to stay, but will they prosper as the market hardens?
Like them or loathe them, managing general agent (MGA) deals are here to stay. They suit the insurer looking to transfer cost while maintaining top line growth, and it suits the broker or network intent on widening its margins.
The network battleground, merger and acquisition activity and the movement of power and profit to the distributor all point to continuing MGA activity.
National brokers too are doing MGA deals or considering their position. But has the industry bitten off more than it can chew, and will MGAs prosper as the market hardens?
Insurers are waiting for MGAs to prove themselves as vehicles. In theory, to suit all parties they must still hit growth targets, and provide the returns on capital sought by the carriers – no mean feat.
An MGA needs to surmount many additional obstacles including recruitment, re-engineering processes, merging books of business, portfolio selection, marketing and FSA compliance – all while keeping the customer happy.
We have already seen early termination of agreements, the Primary-Royal & SunAlliance instance reported in these pages being an early example. Arguably, today’s typical MGA deal is a glorified delegated authority scheme, so for a taste of things to come, it might be worth remembering the decisive deal-ending action taken by insurers at the end of the 1990s and into the early part of this decade.
Repeatedly, the pen was removed from brokers as underwriters responded to a perceived failure of delegated authority arrangements. Many such schemes were terminated, few were resurrected.
Today, with insurers expecting levels of risk selection, underwriting and pricing of which they themselves would be proud, the pressures on an MGA make it a brave departure for the uninitiated. Insurers are looking for evidence that the account can stand on its own two feet. There will be no instances of ignoring the odd large loss when calculating profitability.
For those looking to land the right MGA deal, don’t pitch until you are ready. With insurers becoming more selective at the smaller end, a traditional scheme arrangement used as a proving ground might be a useful MGA stepping stone.
If you are intent on MGA status, expect heightened due diligence, get the people and skill-sets right, build your underwriting frameworks and focus systems and portfolio management information as an insurer would. Invest for the long term and be prepared to discuss development strategy with the carrier.
For those trading with MGA status, take steps to build the insurer confidence in your organisation. Invest heavily in people and culture, have an open-door policy for the carrier, invite in the regulator, develop underwriting portfolio management skills, adopt proven customer management initiatives, have a strategic marketing capability and have an offering that the insurer itself would aspire to.
Set-up costs may be heavy, but an MGA will meet its goals only through continued investment and capability development.
For the independent networks, convincing potential members that a sustainable long term MGA arrangement is either in place, or a considered option, might make the crucial difference in hitting membership targets.
The pen might become more scarce, commissions may be pegged back, but even at its hardest, the market will look to accommodate MGA arrangements that present a compelling case, or have survived through meeting the new challenges, and delivering.
Plaudits and profitable growth will accrue to those that use the capital, understand and execute their customer strategy, invest wisely and work in partnership with the carrier.
If the in-house skills don’t stretch, or are at a premium in the market, it might be worth taking independent advice on how to land or sustain your MGA. Remember – the pen is always on loan.