The MGA Conundrum
Why would I outsource what I do best, my whole reason for being?
This is the core question that every insurer asks whenever they look to delegate authority to someone else. It’s shortly followed by a second question;
Isn’t this what I’m supposed to do?
Well, yes, it is… Sort of…. Sometimes.
This is the MGA conundrum; as an insurer, am I getting in my way when giving the pen away?
In the old days, MGAs could be a useful mechanism to juice the books, put a big estimated premium into your GWP figures, and don’t worry about adjusting it down until a little later, maybe after that quarterly business review. They were also a valuable way to add huge slugs of premium to the books with little or no effort. All this fun on the front end led to some lack of focus on the performance, which in turn led to a negative view of delegation to form in the eyes of many.
Then came broader oversight in the Lloyd’s market – this was the introduction of much firmer rules in approving binders and reporting on the weird and wonderful commission structures that came with them. This added an enormous overhead to writing these types of deals, a lot more scrutiny and a broad reassessment of why these are written.
A great partnership is built on differentiation. If you’re giving away the pen, it should be because you don’t do it best. Maybe they have access to clients you can’t reach. Maybe they write products you don’t know. Maybe, and whisper it, they just do this class better than you. If they do it at all, or cheaper, or better than you, why wouldn’t you delegate?
An MGA that can differentiate on distribution, underwriting expertise, and technology will outperform their counterparts on the carrier side on the products they write. They will essentially have a core focus and the advantage of insurgency. Just look at the various markets created or dominated by MGAs; Renewables, M&A and even in the early days, Cyber. Those who have done this well have benefited from the sort of valuations that accompany fee earning businesses and the corresponding eye-watering capital raises. This is reflected in the growth in this sector of the market. In 2021, revenues earned globally by MGAs, MGUs and cover-holders grew by over 21%. Over 20 of the world’s top 300 MGA groups are likely to have more than doubled their revenues in that year. Global MGA revenues are on track to exceed USD 20 billion by 2023 from premiums intermediated of more than USD 160 billion. MGAs are a core part of the insurance ecosystem.
MGAs that harness technology to make better decisions based on consistent data and can control the process to ensure they are always writing business within their authority are better trading partners. Better trading partners mean more favourable conditions and more freedom to do what they do best – write good business in their niche. For carriers, knowing that their MGA partners are focused on underwriting excellence and execution means that the days of simply outsourcing what you do best are numbered; you’re building a differentiated portfolio. They become a true partner and a force multiplier in classes or geographies where they want to deploy their balance sheet.
The MGA conundrum is solved by creating unity in the value each party brings. MGAs, armed with technology and focus, offer a route to deploy capital where it can create customer value. Carriers with an appetite to grow can find trusted partners with true differentiation from their core product lines and deploy capital profitably.