MGAs: riding the wave of popularity

It’s been a busy year so far for the managing general agent (MGA) market, as more and more MGAs are created and launched into the industry, while others are targets for acquisition.

April was exceptionally busy on this front, with Pro Global Insurance Solutions acquiring Vibe MGA Management, the MGA incubator business of Vibe UK, which owns Lloyd’s managing agent Vibe Syndicate Management; Nexus Group (Nexus) acquiring Capital Risks MGA; and Tokio Marine HCC’s crop insurance unit Producers Ag Insurance Group agreeing to acquire the Kansas-based crop insurance MGA AmTrust Agriculture Insurance Services.

Why are MGAs such an attractive proposition at the moment, for both backers and the entrepreneurs running them?

According to Keith Syrett, director at MGA Thames Underwriting, there probably hasn’t been a better time to be running an MGA.

“The combination of insurer mergers and acquisitions (M&A) and consolidation, the resulting reduction in local servicing capabilities and the challenges brokers face in accessing markets to support clients, have created opportunities and fuelled the current development of MGAs,” he says.

Syrett adds that there is no doubt that MGAs have become an established, credible and recognised sector in the insurance supply chain.

“The sector is more confident and professional and has moved from being a market of last resort for difficult or, frankly, the poorest risks that the primary insurers won’t touch, to being an important first point of contact on an increasing number of specialty and more mainstream risks.

“MGAs must deliver profitable business and value to their capacity providers,” he says.

“The insurer relationship, an MGA’s expertise and its knowledge in markets where the primary insurer cannot provide support directly, are critical factors. They support the smaller and specialist brokers whose books of business cannot be managed or serviced cost-effectively by the primary insurers.”

Replacement markets
Syrett stresses that as insurers’ local business-servicing capabilities contract, brokers are struggling to find replacement markets. As a result of this MGAs can help by providing brokers access to the right markets and expertise to meet their clients’ needs.

Longevity is an important factor for brokers; they want a consistent and long-term partner, not one that is in and out of the market for a quick profit.

Deliver these right and brokers will keep coming back, he says.

“The opportunity to build a stand-out reputation for underwriting expertise, relevant products and longevity of support in a business that can deliver good, consistent growth is very exciting,” Syrett adds.

“Greater control and the ability to deliver the responsive, high standards of service required while maintaining focus with a clear strategy and business appetite are key to building long-term relationships and rewards.”

As the number of MGAs has continued to increase, the London Market has realised the benefit of using these operations to add value to any specialist underwriting strategy, says Craig Curtiss, class underwriter, political violence, at IGI.

Curtiss feels that UK MGAs are of particular interest to reinsurance firms due to the attraction of being able to grow into the various regions around the country.

“For a business line like terrorism insurance that is constantly adapting and evolving, the insurance industry must also adapt to cater for the changing risk landscape,” Curtiss says.

“New threats are frequently emerging, which is unsurprising in the increasingly unstable world of terrorism. We have seen new trends in terrorist attacks, such as ‘lone wolf’ attacks—for example, extremists driving vehicles into crowds of people in an attempt to maximise the carnage.

“It can take place anywhere, not just in large cities.”

As a result of these events, Curtiss explains, IGI has written a worldwide political violence and terrorism book for the past six years and is now looking to use the MGA model to support its underwriting strategy. While many of the bigger books of business come into the Lloyd’s and London Market, there is still plenty of terrorism business to be written in the regions, he says.

In addition, Curtiss points out, an underwriter like IGI will not have access to regional UK business, but an MGA will.

“Smaller premium, high volume business makes no economic sense to underwrite in London on a case-by-case basis, but at the same time it will complement the bigger risks that we see in London,” he says.

“Spreading the risk in a portfolio is important for a business line such as terrorism. In that sense, regional terrorism insurance via an MGA structure is a compelling proposition, bringing London Market expertise to the regions and in turn streamlining the process.”

Investment returns
Keith Nevett, head of business development at Asta Managing Agency, says investors see an MGA as a low-cost market entry option with the prospect of a quick and significant return on investment.

Scaling the business into a ‘super MGA’ is a cost-effective way to create greater value. MGAs could also provide a ring-fenced environment for the live testing of insurtech innovations.

“Capacity providers are attracted by low-cost product innovation, distribution, and geographical reach,” says Nevett.

“MGAs assume key tasks including claims, compliance, and actuarial, reducing the associated costs for insurers while delivering the enhanced profits made possible by the ability to change underwriting and pricing quickly to respond to a change in risk appetite or market conditions.

“Finally, MGAs enable insurers, like investors, to test insurtech with minimal risk or investment.”

According to Nevett, entrepreneurial underwriters have observed the high multiples achieved through recent MGA acquisitions, and will see creating their own MGA as a path to success and greater personal reward.

It is also a way to eliminate some of the uncertainty caused by M&A in the sector, since forming your own MGA gives you greater control of your own destiny.

The principal underwriters of MGAs enjoy a more diverse environment, one which allows their entrepreneurial spirit to thrive outside the silo mentality common in many larger insurers, he says. They also have the ability to make decisions quickly.

Nevett stresses that an MGA is still relatively cheap to set up, especially compared to the cost of the capital, infrastructure, and the investment in functions such as compliance that are required to run a traditional insurer or syndicate.

“Outsourcing these functions to a specialist partner also helps to reduce cost and provide a ‘plug and play’ solution for startups,” says Nevett.

“MGA underwriters can build and deploy technology cheaply and quickly, which reduces operating costs and speeds up new product launches and the delivery of value to brokers and end customers.

“Experienced underwriters setting up their own MGAs will have spent years establishing strong and close relationships with producers and markets. These make all the difference, especially for startups.

“An underwriter’s control over distribution and ownership of customer relationships can never be so great when working for a larger insurer,” he concludes.

Nimbleness the key
Nimble business models, advances in technology, pools of data, increased access to various forms of distribution and greater capital availability have created a perfect environment for MGAs and managing general underwriters (MGUs) to thrive, as startups and as established firms, according to Christopher Schaper, chief executive officer, Victor Insurance Holdings.

“When effectively run, MGAs/MGUs are efficient and nimble, with costs kept down at both the front and the back end. They are attractive for investors and entrepreneurs because they are lean and agile,” says Schaper.

“In addition, there usually is a high level of expertise within the MGA/MGU, focusing on underwriting discipline and product innovation. Such top-tier talent—combined with low frictional costs and scalable technology—provides MGAs/MGUs with the ability to attract more distribution interest, and with the use of superior analytics, to underwrite more types of risks more swiftly and comprehensively.

“Ultimately, this means they are well positioned to expand quickly and at lower cost. When you add in claims-handling services, then you are starting to create a new model type offering quick, efficient, unparalleled services. The overall approach creates strong execution potential generating exceptional returns,” he says.

“Victor is an MGU with decades of underwriting experience, handling more than $1.5 billion of premium with a staff of 800 employees, so you could say we are a legacy firm,” he continues.

“We have invested in converting existing systems in our legacy MGUs to provide a real-time, digital experience. We have also made some strategic acquisitions, such as in the digitally-enabled organisations Dovetail and ICAT, both in the US. The results have been significant.

“Previously, it could take two to three days to underwrite risks for smaller accounts. Now, it takes less than two minutes. This allows our agents and brokers to prosper by spending less time on these smaller risks.

“As an MGU, we are getting ahead of legacy competitors, and competing with any startup, as we use technology and analytics to improve our bottom line and provide greater value to our brokers or agents and their clients.”

Schaper adds that the value proposition for investors and entrepreneurs is directly related to the one offered to the insured.

“MGAs/MGUs can bring speed, analytics, cost-efficiency and security to the agent and insured in one package for multiple products.

It’s a very attractive proposition for all parties including insureds, investors and entrepreneurs,” he says.