Just a few years ago it was common to hear people discussing whether we had reached “peak MGA” as the rapid expansion of the sector appeared, at least to some, to be running out of steam. How misplaced that analysis seems now.
Wherever you look in the UK, Europe or North America, managing general agents are still expanding, and new firms are coming into the market. One of the key factors in this continued growth is the convergence of insurtech innovators with what might once have been called traditional MGAs. The overlay of cutting-edge technology with the underwriting flair that typically characterises a successful MGA has injected fresh energy into the industry. It has also driven out inefficiency and cost – the latter a growing concern not so long ago, especially in London.
The sector has also left behind the days when it rode the insurance cycle, cashing in on the desire of primary insurers to use spare capital as market conditions softened.
“The premise that MGAs used to appear at a certain point in the cycle when there was available capacity just doesn’t hold true anymore,” says Pat Brice, distribution director at CFC Underwriting.
He has a much clearer vision of where the sector’s strengths lie. “The MGA sector is increasingly focussing on emerging risks and areas that demand a more innovative approach,” says Brice. “Historically, traditional carriers haven’t had the agility and flexibility to exploit these opportunities.”
There are also many more players prepared to back innovative MGAs, with a variety of models evident on both sides of the Atlantic. It is estimated that around 80% of the capacity still comes from mainstream insurers, but innovative capital models are allowing some firms to tap into private equity, pension funds and sovereign wealth funds. The major reinsurers are now key players too.
There is a wide variety of factors behind the continued growth of the sector.
Some of it is simply down to “rates driving the growth”, says Greg Williams, senior director with AM Best in New Jersey, especially in areas such as professional indemnity and cyber. He also highlights the ability of MGAs to seize opportunities quickly. “Where we do see a big differentiator from the mainstream market is their ability to leverage technology and be more nimble. They are more entrepreneurial,” Williams says.
Technology is now centre stage for MGAs as they gradually converge with the insurtech sector that threatened so much disruption to the insurance market but has not always succeeded in gaining the traction necessary to build on its technological innovation.
“Insurtechs haven’t always had the substance in terms of insurance expertise and distribution,” says Myles Gould, director of analytics for AM Best in London. “What we are seeing now is a bringing together of the two sectors, marrying the insurtech flair and innovation with the insurance expertise of an MGA to create a viable business model.”
The evolving relationship between MGAs and insurtechs is definitely a feature of the UK market, says Michael Keating, CEO of the Managing General Agents’ Association, the UK trade body for the sector. “MGAs have the distribution and are closer to the end customers. Insurtechs have delivered some innovative customer journeys, but they often struggle to find customers. They can offer innovation and speed, which sits well with MGAs’ ability to identify niches for new business.”
It is by continuing to exploit niches in the market that the sector will continue to grow, says Keating. “Insurers now see MGAs as part of the strategic direction for their business. They are not as nimble as they would like to be, so working with an MGA gets access to new markets and helps develop new products.”
Policyholder attitudes, especially in commercial lines, have changed and in a way that makes growth easier, says Jon Stambaugh, senior vice president at Gallagher Bassett in Kansas. “The growth continues because insureds are more comfortable with embracing alternative risk financing solutions,” he explains.
His colleague John Fearn, chief client officer in the UK, says COVID-19 also prompted a reassessment of MGAs among some businesses that were previously hesitant about placing their risks with them. “The widespread adoption of technology, some of it developed by insurtechs, can be traced back to the pandemic. It changed the willingness to use technology and trust it.”
It also helped MGAs refine operational models, driving them to a new level of efficiency.
Amy O’Brien, vice president, carrier practice sales, for Gallagher Bassett in Rolling Meadows, Illinois, says the same trends are evident in the US. “It is such a viable option now. We even see traditional coverages being put into MGA programmes.”
One trend in the wider insurance market that has not swept through the MGA sector as fiercely as elsewhere is consolidation. And there are some good reasons for this, according to Keating.
“There are a number of factors why we have not seen the same rate of consolidation as, say, in the broking sector,” he explains. “Acquiring MGAs for consolidation is a more complex process, especially with the due diligence required around the persistency of capacity. With some MGAs there are long-tail capacity issues. These don’t exist when it comes to brokers, whose financial models are not as complex.”
The MGA market does not stand in splendid isolation, however, and it is bracing itself to face the headwinds of inflation and economic recession. These will impact claims and operating ratios, warns Keating. “The headwinds will press hard on fraud, indemnity inflation and the way claims are handled. Everyone on the value chain will need to be on top of these, ensuring that genuine customers are dealt with well,” he says.
This brings the crucial relationship with third-party administrators and loss adjusters into sharp focus.
There is a wide range of MGA operating models, from those that focus exclusively on underwriting and leave the customer relationships to their broker partners, to those larger, longer-established MGAs that want to own the customer journey from policy inception to claims settlement.
This is essential, says CFC’s Brice. “Any MGA that wants longevity and a strong reputation must take complete ownership of the customer relationship,” he explains.
One MGA that has been on a journey with its claims operation and has gone from using multiple TPAs to a single TPA arrangement to now bringing claims handling in-house is Plum Underwriting, part of the GRP Group.
“Many insurers haven’t changed from the old loss adjuster model and wonder why they have kids running around with iPads trying to adjust claims,” explains Colin Herrington, head of claims. “If juniors deal with FNOL, they don’t have the ability to triage and change the direction of claims. They just follow a process.
“I built a team of in-house experienced claims handlers working with one TPA, but I still didn’t have the control over the speed, over the suppliers, over the claims system and, most importantly, over the customers.”
Herrington points out that the capacity providers realise MGAs are not all about underwriting and that their profitability depends as much on how they manage claims.
“MGAs are well informed about the claims, and insurers realise that we can have as much influence over their loss ratios as setting the right premium rates,” he says.
Herrington believes that the closeness of the relationship he now has with suppliers, and the ability to agree on the scope of work quickly, will help reduce cost leakages and demonstrate to insurers that the in-house claims handling model works. TPAs are also adopting this wider focus on cost control, says Fearn from Gallagher Bassett. “Historically, the focus was
on indemnity spend; now it is on total cost of risk. It is a phrase we hear a lot more.”
This requires robust data that is readily shared among the TPAs, MGAs and insurers, according to his colleague Charlotte Harrison, senior business development manager in London. “We now have MGA clients who look at their data several times a day,” she says.
There is no doubt that good-quality data is key to building lasting, robust relationships between MGAs and TPAs, says O’Brien. “MGAs are looking to have greater control over their programme, the lines they can write, capacity they can rely upon. I think that the greater push towards tracking more thorough and timely data is helping this.
“When an MGA has better data, they can demonstrate a more favourable loss pick; they can better negotiate their contracts and have better outcomes, including greater customer and insured satisfaction.
“As a TPA, we see MGAs wanting more control over how claims are reported, the gathering of data, handling of claims, greater customer service, and more thorough reporting on outcomes.”
As to where and how all this new expertise, capacity and fresh capital will be directed, the constant refrain you hear across the market is “niche, niche, niche”. But that will not be enough in itself, says Brice. “We need to see MGAs evolving from a pure risk transfer model to work closely with clients to assess, prevent and mitigate risk.”
