A recent bit of “thought leadership” about MGAs got me thinking about the structure and its future.
Positioned as myth busting, the little essay made five solid points.
First, MGA growth is not sliding with the pricing cycle. Premium is growing, the number of large MGAs is rising, and the fronting channel is expanding.
Second, MGAs are successful beyond niche lines of business. Citing the US surplus lines market, the piece highlights growth across mainstream commercial liability and property arenas, where MGAs are important.
Third, MGAs have demonstrated admirable underwriting discipline.
Fourth, they are able to compete with large carriers on distribution, since that part of our sector’s value chain has become much more of an exercise in leveraging software and data than hiring agents, the article argued.
Fifth and finally, technology rather than capacity and relationships have proved the key differentiator for MGAs which, due to their typically lean structure, are able to explore, adopt and incorporate new tech fast and efficiently. That gives them a lead over their potentially larger and more cumbersome backers.
I’m a former London market MGA CUO, so each one of these points got me thinking.
A lot of people believe – or used to think – that MGAs’ role will shrink with prices. But it ain’t necessarily so. Underwriting shops are extraordinarily appealing to carriers and brokers, and therefore to buyers, for multiple reasons that defy the pricing cycle, and even serve to circumvent it.
First, for carriers, MGAs are appealing because they grant access to high-end underwriting without increased headcount. That means carriers don’t have to choose between retaining or losing underwriting teams when the market cycles down. They just shut down the binder.
Similarly, underwriters don’t have to write underpriced business to justify their salaries. Underperforming MGAs will no doubt lose their capacity, and may wither. That leaves high-performance MGAs to continue to attract and deploy capital, perhaps in a less competitive environment. MGAs are cycle-busters.
More importantly, perhaps, the cost advantage remains when business is profitable and attractive. Although MGAs are, indeed, another mouth to feed, carriers make greater offsetting savings (or at least they ought to). With more and more capacity granted at MGAs’ CUO or active underwriter level, or to a portfolio team that runs at a far lower expense ratio than a standard line-of-business unit, capacity providers can manage down their internal expense ratios significantly, more than the lower commensurate cost of outsourcing to MGAs.
The belief that MGAs are useful only for niche business has, in my opinion, never being truthful. The evidence lies in the fact that many MGAs already thrive in what could be described as volume classes, or even as commodity business. This is partly because of reason no.1 (carriers like MGAs), and also because MGAs can embrace technology so much more easily (see below).
Concerns about underwriting discipline were valid many moons ago (although within my memory), when capital providers paid MGAs a top-line commission, but that practice is ancient history. MGAs’ lunch is served today primarily as a profit share, with commission just the appetiser. Some still perform poorly, as will always be the case, but that’s the nature of the dining experience; capital providers with appetite for lower return thresholds will be there to feed them until the fare is desperately paltry.
Truth be told (and to stop torturing the metaphor), the lowest loss ratios I’ve ever seen were achieved by MGAs writing reasonably mainstream commercial business. Extraordinary modelling and quoting technology has allowed them to offer risk-based pricing, so brokers seeking coverage in their constrained classes tend to place worse risks at lower prices with less-well-informed (insurance company) competitors.
The fourth myth busted by the article – MGAs are too small to compete – never held water. Adam Smith taught us the value of specialisation, and Lloyd’s up until R&R was little more than a collection of MGAs operating with the same logo. Risk carriers are extraordinarily enamoured with the practice of outsourcing underwriting to MGAs, in part because small is beautiful (read: cheaper).
Plus, MGAs focus on only underwriting. Brokers do the selling. Once the brokers notice you as a market, it doesn’t matter how many of you there are to accept the inbound, as long as you can answer the emails fast enough, and that’s down to tech.
That supports my views on point five, that technology is more important than capacity and relationships as a differentiator for MGAs. It’s the most important differentiator for everyone in our marketplace.
If I look far enough into the future – and it isn’t very far – tech will allow the specialisation to go even further. We’ve seen a flurry of announcements lately about how risk carriers are forming sidecars to accept third-party capital. That trend has been accelerating for two decades.
With enough of it, the insurers’ role becomes one of transformer and licence-holder only. That means they can shed the outsourced capital, as well as the outsourced underwriting talent, when times get tough. Like hybrid MGAs, they should keep everything honest by keeping some skin in the game, but that, gentle readers, is where the future lies. It isn’t far off.
Guillaume Bonnissent is CEO of Quotech.
