Overcoming adversity

Insurers have benefited greatly in recent years from relationships with managing general agents (MGAs)—whether it has been through access to new, more specialised markets or in helping them reduce costs.

“If an insurance company wants to move into a specific market, but doesn’t have the relevant expertise in house, it might consider working with a relevant MGA,” says Alasdair Stewart, head of corporate development and general insurance at the Chartered Insurance Institute.

“For this reason, MGAs most commonly operate in niche areas, such as financial risks. An MGA can provide specialist expertise and access to a new market without the time and overheads involved, should the insurance company develop its own in-house function.”

This expertise has been in high demand when insurers want more, and quicker, access to specialised markets, says Mike McMullen, managing principal, PowerGuard Specialty Insurance Services.

“An MGA should be able to get the transaction done faster and be focused on the line of business it is underwriting. It provides the facility to have more expertise involved.”

MGAs can also save insurers money. Most insurers operate with a cost ratio of between 10 and 15 percent of their premium income; MGAs can run things much cheaper, argues Stewart.

“MGAs have fewer centralised costs. They might, for example, operate exclusively through e-commerce, whereas an insurer carries the costs associated with other distribution channels.”

Whilst MGAs can operate in any line of business, each tends to specialise in certain niche markets. There are few general liability MGAs. “Whilst there are a few big ones, most MGAs are formed where a market requires expertise but is not large enough for insurance companies to invest in their own underwriting teams with relevant experience,” says McMullan.

According to Reg Brown, chairman of the steering committee for the newly formed trade association for MGAs—the Managing General Agents’ Association (MGAA)—this diversity in the markets they cover can hinder MGAs operating from within the UK. “There is no central database of MGAs and there is disagreement about their definition,” he explains.

“The FSA [Financial Services Authority] regulates MGAs as if they are wholesale brokers. But we would argue that they are not brokers at all. They are intermediaries, but they are intermediaries on the side of the insurer, as opposed to acting as an agent of the insured.”

This confusion goes further than the FSA . Many insurers also lack this understanding, says Paul Upton, chief executive of Evolution Underwriting.

“Most insurers outside Lloyd’s find it difficult to distinguish between an MGA and a broker,” he says. “This means that MGAs tend to be treated in the wrong way by both insurers and regulators.

“A good example is the regulatory focus on client money. Although it is pretty much impossible for an MGA to hold client money, it has to jump through a lot of hoops to keep explaining that fact.

“The biggest risk an MGA brings to the table is the professional indemnity risk it brings to its insurers if its makes a mistake. However, the issue of segregating insurers’ funds—the thing brokers are regulated away from doing—isn’t relevant to MGAs.”

One of the reasons for such confusion is the difficulty in defining an MGA. “There are all kinds of definitions and there are twists in each of them,” says McMullen. “Generally speaking, a managing general agent is authorised and empowered by an insurance company to underwrite and bind business on their behalf.”

“An MGA should be able to get the transaction done faster and be focused on the line of business it is underwriting. It provides the facility to have more expertise involved.”

The newly formed MGAA is looking to address this issue definition—for UK-based MGAs at least. “One of the reasons for forming the MGAA is to explain to a much wider audience the true role of an MGA,” says Brown. “We also want to persuade the regulator that it should give proper consideration to a true agent—a company that is the agent of an insurer, which underwrites for the insurer, but which is not an agent of the insured and which should not be treated as a wholesale broker.”

But despite the confusion, any suggestion of a separate regulatory system for MGAs should be approached with caution, warns Upton.

“Whilst many elements of the FSA registration forms are not applicable, I am ambivalent about the idea of a separate regulatory system, because it has the potential to introduce other complexities we currently don’t have.

“It might be good if the fledgling MGAA could connect with the FSA to provide this kind of background analysis—it wouldn’t hurt to get people on board at the regulator, so that there is a bit more subtlety around it.”

The MGAA also plans to tackle the poor image MGAs have suffered from of late. “We want to set best practice guidelines,” explains Brown. “Some MGAs have been criticised by some insurers, who have complained about the results.

“We wish to try and raise standards, set best practice guidelines and improve the quality of the underwriting agency sector. We also want to look at examinations, relationships with the Chartered Insurance Institute and run educational seminars targeting the underwriting agent.”

But some of the more general challenges faced by MGAs are not so specific. The soft market is a challenge facing both insurers and MGAs.

“In a hard market, MGAs come into play; we are more popular than ever when it is difficult to get insurance,” says McMullan. “In a soft market, which we have been in for many years now, it is tough on MGAs and an even tougher time to start an MGA.”

Due to the varied roles MGAs can hold, some view them as being in competition with everyone—insurers as well as wholesale and retail brokers.

“Carriers may use MGAs because they provide cost-effective access to niche markets,” says Stewart. “So the main market pressures for MGAs are price and expertise—these are the two key differentiators on which they compete.

“MGAs must be operationally cost-effective because, in simple terms, they are another mouth in the insurance chain that needs to be fed. For an insurer already using a broker, via an MGA, the additional cost needs to be justified and managed.”

Given the other pressures facing MGAs, soft markets can mean that only the best-run and best-positioned MGAs—or those able to innovate—survive.

“A combination of Solvency II, a tightening regulatory environment, the legacy of the soft market and the fact that insurers will have less capital could mean that MGAs using old school models, poor technology, or lacking good transparency and good management information are going to struggle,” explained Upton. “You might even see a little bit of a clear out.”

However, the future remains bright for those ready to meet these challenges. “There is room [in the market], but it depends on whether the MGA has something special to offer,” says Mike Holley, chief executive of Equinox, “There is no point doing it if you are just duplicating capacity that can be done in a different way by other parts of the market.

“However, the insurance market is so broad and there are so many niches— both in terms of specialist product lines and in terms of distribution. The MGA structure is a good way of solving some of those issues. I don’t see any reason as to why the sector shouldn’t continue to grow.”