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AM BEST'S MONTHLY INSURANCE MAGAZINE




The Rise Of the MGA

Risk carriers are turning to managing general agents to handle a growing proportion of their own core strength--underwriting.
  • TBA - Writer
  • November 2015
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Slowly, almost unnoticed, an evolution has taken place in the specialty insurance market. More and more, risk carriers are turning to managing general agents to handle a growing proportion of their own core strength: underwriting. Whether it's coverage for a drone in use on a Hollywood film set, or a German trade credit portfolio, the chances are increasing that it will be underwritten by an MGA.

One estimate puts MGA premium up by almost a quarter between 2012 and 2014, but since MGA premium is combined with all the rest on the ultimate carriers' income statements, it is difficult to pinpoint rates of growth precisely. Still, the continuing trend is plain in the increasing velocity of announcements over the past few months about new and expanded MGA relationships, and outright purchases made by the world's specialty insurers and brokers.

To name but three, National General Holdings Corp. acquired the New Jersey-based auto MGA Assigned Risk Solutions Ltd.; broker Integro purchased the London movie-market MGA Entertainment Risk Management Ltd.; and Ryan Specialty Group's MGA StartPoint expanded to deploy Lloyd's capacity to underwrite U.S. directors and officers exposures. 

"Many insurers are now looking at MGAs as an additional conduit or access to new markets, and with ever-increasing operating costs, insurers are recognizing they can access additional income via what can be a more cost-effective route," said Peter Staddon, managing director of the U.K.'s Managing General Agents' Association. MGAs have a "unique skill set" within their area of underwriting expertise, which they exercise against the ultimate insurer's balance sheet under a delegated authority agreement.

MGAs can provide carriers with instant infrastructure, including well-managed risk and governance structures, intellectual property in underwriting pricing, and access to underwriting talent--all of which is an instant saving for the carrier, since it would require significant investment to build from scratch. Thus, they can bring profitable business to carriers for only a fraction of the permanent overhead involved with employing underwriters in regional or specialist offices.

"Access to distribution and expertise in niche classes of business are the two key advantages," said Martin Hall, chief underwriting officer of Pen Underwriting, one of the U.K.'s largest specialist underwriting businesses, "but successful MGAs are also synonymous with the strength and longevity of customer relationships, robust performance monitoring, and investment in meaningful management information, all of which are highly valued by carriers."

Sector specialism is key. An MGA's in-depth risk knowledge can translate into expert claims handling too, Hall said. "Many of the larger capacity providers do not have the necessary distribution network. MGAs can provide distribution to the regional and smaller brokers," he said. Some members of Pen's team have been working with the same people or trade bodies for 20 years, giving them unparalleled understanding of their business.

Measuring the MGA Market

The scale of the MGA market is large and growing, but no one really knows quite how large it is. Conning & Co. studied the U.S. market, and put 2014 MGA-sourced premium at $33 billion, 12% of total U.S. commercial lines premiums, up from $27 billion in 2012. However, Conning acknowledged that its survey is flawed. The company questioned 400 U.S. MGAs, but estimates the total number is roughly 1,000, with more start-ups than cessations. The total premium they generate could be much more than the investigation revealed, Conning & Co. said.

"The MGA market posted higher growth rates than the rest of the commercial lines in 2014 despite rate softening appearing in several lines," said Bill Broomall, Conning's assistant vice president for insurance research.

Separately, in a survey of insurers who use delegated authorities conducted this year by reinsurance broker Guy Carpenter, 43% of respondents said they thought the market is between $30 billion and $40 billion, and the same share put it in a range $10 billion lower. The rest thought it is larger--up to $50 billion. Two-thirds said they expect the market to continue to grow; the rest believe it will be static.

The American Association of Managing General Agents reports that its 250 wholesale insurance members in the United States and Canada wrote premium of $25.97 billion last year. Under the AAMGA's broad definition, it all counts as MGA premium. Of the total, $5.12 billion--a fifth of the total--is written into Lloyd's, which is the largest insurer of U.S. excess and surplus lines, according to A.M. Best. The AAMGA members' business was 13% of Lloyd's gross premium for the year (at year-end exchange rates), and does not include the substantial and growing premium arising under binding authorities written through MGAs in the U.K., Europe, and elsewhere around the world. Lloyd's itself says about 30% of its income is underwritten indirectly, under delegated authorities.

"Writing business through MGAs is a core strategy of our business, based on historical success in accessing and developing profitable portfolios through such vehicles," said Duncan Dale, chief executive of Dale Underwriting Partners, which manages Lloyd's syndicate 1729. The new operation began business only last year, and has just hired John Andrews, formerly of Arch Europe, as class underwriter for delegated authority business. "One of the attractions is to access localized talent and expertise which is knowledgeable of the risks underwritten," Dale said.

The approach is an old one, said James de Labillière, managing director of Hiscox MGA. "MGAs and the use of delegated underwriting authorities have been around for some time," he said. "They are not a new concept. They reduce the risk of market entry by lowering set-up costs, at the same time as increasing carriers' ability to deploy their capital collectively, thereby adding to their competitive edge." He too noted that underwriting through MGAs provides access to new geographical markets, and introduces specialist underwriting expertise with meaningful line sizes.

Carriers Buying In

A much newer trend is the purchase of MGAs by risk carriers. Ownership offers several advantages. "It allows insurers to expand their product offerings or line size by using third-party capacity," according to Labillière. "It also generates a non-risk revenue stream and diversifies our distribution channels," he said.

The international reinsurer, established on a Lloyd's platform, bought R&Q Marine Services, a superyacht insurer, earlier this year. It has a line size for yachts of $235 million, which Labillière says exceeds the capacity of any of the MGA's supporting insurers. "That makes it a driving force within this very specialist market."

Insurance-company ownership also benefits the MGA, Labillière said. "It has a parent company which understands the risks associated with any underwriting operations, and, in turn, mitigates the risks associated with a small independent MGA operation," he said. Conflicts between the insurer and the MGA need to be carefully monitored, but provisions like regulated structures and underwriting controls can be put in place to manage them.

Many other carriers are making similar moves. In September, for example, the specialty insurer Brit Ltd. made a "significant strategic investment" in the New York MGA Ambridge Partners, which underwrites transactional insurance products, which it describes as "tailored to address issues that arise in a commercial business transaction." The deal provides attractive exposure to a fast-growing MGA in the United States, with niche specialty business, and a strong track record in distribution and underwriting capabilities, said Brit Global Specialty Chief Executive Matthew Wilson. 

Deploying Alternative Capital

MGAs are also used by insurance industry capital providers that do not have their own underwriting capabilities. "There is an increase in alternative capital entering the market, as capacity providers look for opportunities to grow and add scale," said Pen's Hall. "Many MGAs tend to specialize in niche classes of business, and offer capacity providers access to established infrastructure, whether that be underwriting, distribution or the sales and marketing element, as well as an instant and effective route to market," Hall said.

One such arrangement was struck recently by Nephila, the $10 billion, Bermuda-based, insurance-focused fund manager. In September it delegated authority to Technical Risk Underwriters, a Texas MGA in the stable of Ryan Specialty Group, to underwrite U.S. commercial property risks. 

Since Nephila isn't an insurer in the United States, admitted carrier State National Insurance Co. will issue the policies, and expects to earn fees of $10 million-$13 million from the deal. The MGA also underwrites specialists construction risks under delegated authority from 11 insurers, reinsurers, and Lloyd's syndicates. Nephila is reported to be establishing its own MGA businesses from scratch in the United States, under the name Caravel Insurance. Operations are expected to begin next year, to underwrite peak-zone commercial and homeowners risks, which struggle to find capacity. Another alternative capital vehicle, Acappella Holdings, has announced it is to do the same.

Broker Benefits

Brokers can also benefit from the presence of MGAs, which "provide regional insurance brokers with the ability to discuss risks with an individual underwriter who has the authority to make decisions," which isn't always possible when dealing directly with an insurance company, Staddon said. Following the churning up of the broking market, broker business has been transferred between different centers, which affects personal contact and relationships, such that local and "provincial insurance brokers often struggle to speak to the same underwriter."

Labillière said that increasing "localization" of the insurance industry means that carriers want to get closer to the business, and clients want an even more bespoke and service-oriented offering. "This is part of the reason we acquired an MGA, giving us a platform from which to develop Hiscox product lines with other carriers in new locations."

Of course for insurers, allowing others to underwrite against their capital requires due diligence, control, and significant levels of trust. "Passing the pen over to another firm will bring with it a number of potential issues other than the profitability of an account," Staddon said. "Underwriting integrity and the possible effect on the good reputation on the insurer are two of the greatest concerns," he said.

Dale says that many of the MGA relationships in Lloyd's are long-standing. "We access business through Lloyd's brokers, a number of whom specialize in MGA business. With respect to new MGAs, the Lloyd's brokers conduct their own due diligence on an MGA prior to bringing it to market and we, and other participating syndicates, will conduct our own extensive due diligence prior to committing to a contract."

One inherent risk Dale identified is that an MGA is remunerated on a commission basis. "There is always the potential that this could drive the MGA to consider that the amount of premium generated is paramount, as opposed to the amount of profit."

MGAs are agents of the insurer, who assumes the various risks connected to any agency relationship. "Whilst there is considerable regulatory compliance activity associated with underwriting business through MGAs, we believe that, when authority is being delegated, there should be a great deal of attention paid to the compliance of that party to the authority which has been delegated," Dale said. In other words, agents must not overstep the bounds.

Lloyd's works closely with syndicates in the authorization and governance of MGA relationships, but "it is the syndicates' role to manage the relationship with the MGA," Dale said. Still, Lloyd's made extensive amendments to its "Code of Practice" for delegated underwriting in March this year, and in 2013, the London Market Group--comprising representatives of the London insurance companies, Lloyd's syndicates, and London brokers--issued a set of "Market Reform Contracts" which must be used when drafting binding authority agreements. Their use is necessary, in part, because it is very common for multiple carriers to back the underwriting of a single MGA's product.

Larger brokers sometimes use their leverage to acquire carrier support of the MGAs in their own corporate stable. It is not uncommon in the London market, for example, for brokers to offer potential underwriting partners an exposure to one or more of their in-house MGAs, alongside access to the open-market business they are broking. Such arrangements sometimes fix brokerage as high as 35% on the MGA premium with a 25% profit commission. It's a price some carriers are willing to pay to gain access to the broker's broader book.

Enter the Regulators

Relationships are key, Staddon said. U.K. regulator the Financial Conduct Authority, one of the bodies which supervises British insurers, "has already highlighted this, stating it is not acceptable for insurers to see the MGA only at the contract anniversary, and relying on auditing is only a last defense." The regulator views underwriting through MGAs as "outsourcing," and in June conducted a "thematic review" of 12 insurers' arrangements with third parties, including four commercial insurers. It found that for "some firms ... improvements are needed to due diligence and the way they manage outsourced arrangements, particularly in considering and assessing customer outcomes." Linda Woodall, acting director of supervision at the FCA, said: "We expect firms to consider the findings of the report and make any necessary changes to ensure that customers are treated fairly and not at risk of detriment."

The review revealed that some insurers did not carry out any conduct-focused due diligence when selecting third parties, or had not considered whether the products they underwrite treat customers fairly, and that some agents undertaking "product design activities" did not recognize the extent of their responsibilities as product providers, or conducted insufficient oversight of the performance of products and delivery of services.

Such regulation is driving a trend toward larger MGAs. "One of the challenges for MGAs is the ability to evolve and expand their business into one that has the critical mass capable of delivering consistently the returns that the capacity provider expects," said Hall of Pen, whose organization comprises 11 formerly independent MGAs. "It is vital to have a sustainable model, but there are increasing pressures on MGAs regarding conduct and regulatory risk reporting, which has the potential to divert attention and resource, if not well managed, away from growth." Regulatory pressure might mean capacity providers prefer to work with larger MGAs, Hall said.

The MGA advantage for carriers is clear. "One of our businesses, OAMPS, insures a high percentage of all the lorries that transport oil around the United Kingdom, so has an in-depth understanding of how to underwrite and price that risk," Hall said. Alongside that, Pen has access to a team of environmental consultants to call upon if needed. "For example, if there is a crash they know how to stop the oil causing damage to land. It is hard for capacity providers to build up that capability." With carriers seeing margins pinched, and many seeking to diversify the nature of the risks they assume, such benefits seem likely to encourage the rising tide of MGA underwriting to continue.

By Adrian Leonard

(Adrian Leonard is a writer for Best's Review. He can be reached at bestreviewcomment@ambest.com.)



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