Simon Taylor of Primary Group says managed general agencies are not just an adjunct to a broker’s business, they are serious players.
Over the past few months there has been a great deal of commentary on managed general agencies (MGAs), in fact if you were outside the industry you may rank them in the public affection stakes slightly lower than estate agents.
Reading recent market reports and commentary might lead you to believe that MGAs are easy to set up and are simply a way of leveraging more commission without any benefit to the supporting insurer – and more importantly, the premium paying client. So why have so many insurers agreed to provide capital and how easy is it to set up an MGA?
As any good management textbook will say segmentation is the key to understanding any market, and this is especially critical in following the arguments for and against MGAs.
The term ‘MGA’ has become a catch all for a broad spectrum of arrangements, some with only a few millions of revenue, through to those with revenues in the tens of millions. Some of the agreements include the delegation of underwriting and claims, some just underwriting. The scope of delegation can also range from the very prescriptive through to the freedom to set rates.
Insurers have in the past been attracted to managing agents because they can provide access to specialist markets and underwriters. More recently, for many of the larger insurers, the attraction has been access to independent brokers, which they thought would disappear with the introduction of greater regulation, and which they can now deal with only via call centres because of drastic cuts to their regional office structures.
MGAs have provided significant revenue growth for insurers without any of the structural costs and associated risks, therefore transferring many potential fixed costs over to variable costs. MGAs have effectively, therefore, agreed to take on the entrepreneurial risk, for which insurers have been willing to pay additional commissions.
When these positive aspects are not present and an underwriting agency is set up by a broker as a funnel for its existing business, adding a further distribution layer, then the potential for problems increases. Higher commissions are often justified because of ‘work-transfer’, even though many insurers end up duplicating the work as they input individual policy details into their back office systems. This simply supports the argument of those who want to see the introduction of full disclosure, because the extra commission is not seen to be benefiting the customer.
“Segmentation is the key to understanding any market and this is especially critical in following the arguments for and against the support of MGAs.
Simon Taylor, Primary Group
The MGAs that will succeed over the whole cycle are those that invest in a number of key areas. These include: experienced and competent underwriting and claims personnel; a clear underwriting and pricing philosophy; detailed management information; a good range of policies and services; and a clear service proposition. These provide the starting point as this investment needs to be ongoing, which means regular training and testing for all, constant analysis of the management information, and regular product reviews. In short, an MGA is a full time and specialist occupation.
Most important for success, however, is the time and effort invested in choosing the right business relationships, whether these are with insurer partners, brokers or other suppliers. There must be from the outset a common understanding and clear targets and goals. As with all relationships it then requires that time and effort is reinvested and, critically, that there is transparency and understanding of these shared ambitions at all levels of the relationship.
There are those managed agents whose activities are an adjunct to their main business. There are also those for whom being a MGA is their sole and full time focus. They take it seriously because they have no other business to fall back on. To decide the success or failure of the MGA model on commission alone is naïve. Real success will be based on the financial returns that they allow their shareholders, brokers and insurers over the cycle.
There is an old saying, ‘if it was easy then everyone would be doing it’. Building and running a sustainable MGA might look easy but those that have tried know the truth, which is that only the strong will survive.
The good news is that what strong MGAs can offer smaller independent brokers is their only hope as they face appalling service, dumbing down of technical ability and increased standardisation from the conventional market.
There is another way.
Simon Taylor is marketing director of the Primary Group.