OLDWICK, N.J. //BestWire// - While catastrophe losses continue to be the leading cause for insurer insolvencies, a number of insurers ran into trouble after relying too heavily on delegated underwriting authority enterprises.
Dawn WalkerFrom 2000 to 2022, the third-leading cause of impairments was due to affiliated programs, according to Rapidly Increasing MGA Premiums Warrant Greater Oversight, a Best’s Market Segment Report that provides an analysis of the U.S. property/casualty market during that time period.
Giving affiliates authority over the underwriting of accounts or policies is common practice. When properly managed, these partners can bring valuable expertise, especially in niche markets, and help insurers quickly scale their operations upward, according to AM Best Associate Director Dawn Walker.
But there are plenty of things that can go wrong, resulting in an insurer’s insolvency. It can happen when a new, thinly capitalized insurer is trying to ramp up business too quickly; when the interests of the insurer and the managing general agent don’t necessarily line up; or when an insurer doesn’t conduct due diligence in selecting an affiliate partner, she said.
“In some cases, the insurer may give too much authority to an affiliated managing general agent without implementing effective risk management controls or oversight,” Walker said. “This can lead to the underwriting of unprofitable business in exchange for short-term gains.”
In Louisiana, regulations that went into effect over the summer gave the state’s department of insurance greater oversight of the relationship between insurers and MGAs. The new law also bars certain officers, directors and other executives from insurance companies that became insolvent from acting as MGAs in the state.
“The legislature gave us additional authority. We’re using that where we can to make sure these structures are set up right; that they have the right management in place; and that their intent is to come in and provide an affordable product at an affordable price,” Louisiana Commissioner of Insurance Tim Temple said. “I feel comfortable that the legislation we passed is going to improve the Louisiana market to the benefit of the consumer.”
Some of the 13 insurers AM Best looked at in its report started writing business in catastrophe-prone areas at a time when weather wasn’t an issue, only to be blindsided when natural catastrophes occurred. Temple said reinsurance had become an issue for many Louisiana insurers that found themselves insolvent.
When utilized correctly, affiliated and nonaffiliated programs offer specialized underwriting and risk management services, which can contribute positively to the growth of both the MGA and the insurer, Walker said. But it’s not a perfect system, analysts say.
“Problems can arise when an insurer that is only meeting minimal capitalization levels may also have an overly aggressive growth strategy and chooses to partner with an MGA on underwriting business, maybe even in catastrophe-prone areas,” Walker said.
She described a scenario in which newer, smaller, or regional insurers that are looking at where they can grow turn to insurers of last resort. It may be in an area that has not been hit by a hurricane for a few years, and the insurers think they can get a boost from picking up business there.
The thinking is “we’ll service that business and try to write more business in that area. Right now, we haven’t had a hurricane in the last year or two,” Walker said. “If we take a step back and look at it from a high level, we know that it’s only a matter of time before a really bad hurricane happens.”
It’s the type of scenario that recently played out in Florida, which saw quiet hurricane seasons in 2023 and most of 2024 before Category 4 Hurricane Helene and Category 3 Hurricane Milton struck over the course of two weeks in late September and early October. This is when the claims start to pour in. When insurers can’t keep up with the claims, that’s when the issues may materialize. That can be a bad time for insurers to find out that their goals don’t match up with the business written by MGAs they partnered with, Walker said.
“The MGA’s interest may be more in line with generating more business and subsequently higher commission fees,” Walker said. “This scenario has the potential to undermine an insurer’s underwriting authority. Also, claims may not be as substantial but eventually this strategy — without the appropriate oversight — can lead to significant losses for the insurer. Insurers may become too reliant on MGAs for premium generation without ensuring proper alignment of interests.”
This is why insurers must do their due diligence when selecting MGAs to partner with.
“It’s part of the business process — to make sure they are partnering with quality MGAs,” Temple said. “At the end of the day, the consumer has to be protected, and the insurers have an important role to play there.”
It’s a 50/50 proposition, Walker added, noting MGAs should meet certain standards in terms of conducting due diligence and being able to answer the due diligence that the insurer presents to them.
“The acts of the MGA are perceived as the acts of the insurance company,” Walker said. “It all gets put on the insurance company at the end of the day as far as what takes place and what happens.”
Under Louisiana state law, MGAs already were being examined as though they were the insurer. House Bill 672, which was passed in May and took effect on Aug. 1, expanded on this idea by requiring MGAs to supply quarterly reports to each insurer with whom it has a contract. The report must include premiums, losses, expenses and fees for the quarter, according to the text of the bill.
The MGA also must submit an examination of its own financial condition and compliance with state laws that impact the conduct of its business, as the commissioner deems necessary. Temple said the regulations give the department “additional authority to look into agreements that the MGA has with other outside entities to make sure that they are not just shipping funds out of the entity to shield them.”
Thus far, it appears to be working, Temple said. He’s received feedback from primary insurers and reinsurers that the legislation is restoring confidence in the Louisiana market, and he’s seen an uptick in the number of companies expressing interest in writing business in the state.
The new regulations came at the behest of legislators based on what they saw in the insurance market. And it came when 12 entities became insolvent after Louisiana was hit by hurricanes Laura, Delta, Zeta, and Ida in 2020 and 2021, Temple said.
An investigation conducted by department staff under the previous commissioner found the cause of those insolvencies was inadequate levels of reinsurance, and not necessarily the company’s legal structure, Temple said. Under the new regulations, “we’ve got additional insight into reinsurance purchases to make sure they are buying adequate amounts of reinsurance,” Temple said. “That was not taking place previously.”
In its report, AM Best reviewed 13 insolvent insurers that operated with an affiliated model and found that within one year prior to insolvency, 98.9% of the total direct premiums written were sourced through the affiliated MGA. While more difficult to delineate, unaffiliated MGAs also have contributed to a number of insurer hardships over this period.
Nine of the 13 had surrendered 100% of their premiums to MGAs within a year of their insolvency. Of the others, two were greater than 99%; one was over 96%; and the lowest percentage of total premium turned over to an MGA by an insurer on the list was 88.4%.
(By Anthony Bellano, associate editor, Best's Review: anthony.bellano@ambest.com)