Better risk management strengthens MGAs’ stability

By Erin Ayers on April 28, 2014

Managing general agents have improved their market stability through better risk management practices, according to a new report from Conning.

“Managing general agencies are a key distribution resource for insurers focused on specialty markets,” said Bill Broomall, analyst at Conning. “While the MGA market has endured periods of volatility due to their association with a number of insurer failures, the model now appears to be stable due to improvements in risk management practices. With almost 10 percent of commercial premium in 2012, the MGA channel is critical to accessing specialty risks.”

The study examined MGA specialists and their relationships with insurers and agents.Conning said that commercial lines premiums written through MGAs totaled about $25.7 billion in 2012. Insurers use MGAs to tap into significant underwriting expertise for specialty markets, both admitted and nonadmitted.

Conning suggested in the report that the financial challenges for several insurers operating through MGAs were “isolated incidents,” despite concerns for more trouble ahead, and the MGA market has a favorable long-term outlook.

Some of those insurer insolvencies, while not entirely driven by MGA activity, may have been accelerated by it. Business written through MGAs “created the volatility,” according to Broomall.

Broomall said insurers and MGAs reevaluated risk management practices following a series of insurer failures in the late 1990s and early 2000s. Updated practices included adjustments to commission structure for MGAs, which has “better aligned” business goals, he explained.

Commissions have shifted to either a sliding-scale basis, according to Conning, or the “rent-a-captive” structure, where MGAs retain a portion of the premium.

Insurers have also instituted more frequent audits to ensure MGAs are writing the type of business insurers want to have on their books. Finally, insurers are more active in the reinsurance buying process with MGAs, said Broomall.

Overall, Steve Webersen, director of research at Conning, said MGA insurers “generated direct premium growth above the commercial property casualty industry in seven of the past ten years and have also outperformed the commercial market in loss ratio.”

He said the long-term outlook is favorable.'

Erin is an editor at Advisen. She has 15 years of journalism experience. Prior to Advisen, Erin covered property-casualty insurance for 13 years as editor-in-chief of The Standard, New England’s Insurance Weekly. Erin is based in Boston, Mass. Contact Erin at [email protected].