The managing general agency (MGA) marketplace in the United States is thriving. With premium in the specialty lines market reaching record levels in recent years, MGAs are riding a solid growth curve which is well outpacing the general insurance market.
In the face of so many opportunities, the MGA market has become somewhat “crowded,” according to Andrew Matson (pictured top), head of structured solutions at McGill and Partners, forcing MGAs to find ways to differentiate themselves through product, pricing, distribution, innovation, and other means.
According to Matson, the top MGAs distinguish themselves within a crowded marketplace through either “well entrenched distribution models, which are not easily or economically viable to replicate” and/or by building up class-specific expertise within the niche sectors that they serve.
“Carrier and capital providers alike, who are often generalists, can gain access to this highly desirable business without significant investment themselves by partnering with specialist MGAs,” Matson added. “However, that same ease of access to niche segments via MGA specialists also has a downside for an MGA, in that the carrier partner can turn off capacity just as quickly, and with little to no legacy costs, as they turned it on originally.”
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With the relationship between MGAs and carriers being “sometimes transient,” Matson said more of the sophisticated MGAs are looking to move away from the legacy MGA/carrier model, and they’re now “aggressively looking to establish broader, and more multi-year partnerships.” They’re willing to forego potentially higher ceding commission on short-term deals to gain longer-term commitments to capacity.
In recent years, there have been some grumblings among carriers that, in certain sectors or circumstances, MGAs add frictional costs to the value chain, rather than reducing costs or enhancing value. This, according to Christopher Miller (pictured right), partner, structured solutions, at McGill and Partners, has resulted in many MGAs losing the support of their capital provider, playing into the “sometimes transient” nature of MGA/carrier relationships.
“Duplicate roles and costs can be problematic if not contemplated up front in a traditional MGA/ carrier relationship,” Miller told Insurance Business. “This is most often an issue with legacy carriers which have well established and broad infrastructures, often built to service their traditional business. However, when at a later point in time that same carrier also looks to distribute through MGAs, some of those roles, and the associated costs, are redundant with the MGAs’ own infrastructure.”
Matson added that this has proven less of an issue for some of the new carrier entrants into the MGA space, those who are implementing “lighter-touch infrastructures” in acceptance that their MGA partners will bring their own purposely built infrastructures and servicing platforms.
“Further, with many MGAs now owning their own distribution and the infrastructure to service it, these businesses are proactively seeking out and developing strategic, long-term partnerships directly with capital providers that truly understand and value their role and expertise across distribution and the underwriting of niche, low-volatility classes,” said Matson.
“Within the insurer market there is a perception that MGAs are inefficient and perhaps this is exacerbated by both parties paying internal expenses which arguably are duplicated in that they contribute to the same type of services, for example, technology platforms. More broadly, however, clearly there is an expense saving for carriers (or transfer) where the MGA acquires and services business on their behalf.”
In recent years, reinsurers have started to turn to MGAs to service business for them on an end-to-end basis. Miller put this strengthening relationship down to a few key trends. One is the “recently energized fronting market,” which is giving MGAs access to reinsurers who are looking for new distribution channels into stable blocks of lower-volatility business. He added that as fronting carriers participate more actively in the MGA space, this is spurring on additional interest from reinsurers due to better “fundamental alignment of interests” than the historical norm.
“Further, reinsurers are now proactively seeking out MGA-produced business to help offset or counterbalance the reduction in ceded premium they have witnessed, as traditional carriers manage their capital more efficiently,” Miller added. “For the reinsurer this means a reduction in ceded premium and an increase in relatively ceded volatility.
“This creates a tremendous opportunity for McGill and Partners to develop and structure portfolio solutions which concurrently solve the MGAs’ long-term capacity needs and offer reinsurers access to highly desirable, large and stable blocks of diversified niche business.
When MGAs make the economics work with their capital providers – whether they’re insurers, reinsurers, or alternative capital providers – and they’re able to focus on procuring niche distribution and business at a lower cost, this enables MGAs to create strong, long-lasting partnerships.
“Best in class MGAs, with smart management teams, and financially savvy backers (private equity, venture capitalist, etc.) will develop much closer relationships with the ultimate capital providers,” Matson commented. “This way, through a more aligned partnership and structure, MGAs will continue to eliminate many of the superfluous frictional layers and costs which plague this segment today.”
