Growth Strategies Through MGAs: Opportunities and Risks

Insurance companies write policies directly in areas where they can achieve volume and have the knowledge and experience to make effective underwriting decisions. Larger property and casualty insurers tend to focus on products that have high volumes, but if a customer needs insurance for a more uncommon reason – or for any reason outside the insurer’s major business lines – then managing general agents (MGAs) and program administrators (PAs) can help bridge the gap.

MGAs are part of the delegated underwriting authority enterprise (DUAE) Market. Observed by A.M. Best in May 2024, MGAs’ premium growth grew at a double-digit rate for the third consecutive year in 2024, climbing 14.9% to reach $81.4 billion in 2023. This growth is underscored by rising partnerships with MGAs by insurance carriers to write specialty business.

MGAs and PAs are wholesalers who can offer specialty types of insurance outside the main lines offered by insurers. The insurers may not have the in-house expertise, business relationships, or technology to efficiently handle these products, so MGAs are brought in to properly underwrite the risks, service the policies, and handle claims. In some cases, the insurers may have the expertise for a particular line of business or market (e.g., excess and surplus lines). However, they may look to expand their coverage into other regions or territories where the MGA has a strong distribution network. When an insurer works through an MGA, the MGA performs such functions as subcontracting with independent agents for placement of business, managing agency relationships,  handling claims, issuing policies, processing endorsements, collecting policy premiums, or being responsible for the completion of regulatory reports for state or federal agencies. In exchange, the MGA will typically receive a monthly commission based on their premium production for the reporting period.

Insurance companies don’t usually own but instead contract with PAs and MGAs – at least not initially. They most often start a relationship by partnering on specific types of policies, using a service-level agreement (SLA) to define the terms of the business agreement. In these types of arrangements, premium and commission terms can vary.

MGA and PA Activity is Increasing

Insurance companies have been working with MGAs and PAs more and more over the past couple of years. We’ve seen the pace increase dramatically for some of our clients, with some acquiring or entering into SLAs with multiple MGA or PA partners across various product lines. As a result, property/casualty carriers are on the hunt for new premium dollars welcome the profitability that comes with the specialty underwriting skills that MGAs bring.

Potential Growth

When insurers decide to expand their product offerings via PAs and MGAs, they can expand both sides of the business. Larger insurance companies get the specialized business of the acquired MGA, and then can use their established infrastructure to help the MGA achieve scale and get their services in front of a wider audience. Also, an MGA’s smaller size, coupled with its knowledge and expertise, enables them to be more responsive to customer questions/needs, which can be an advantage.

Other significant advantages that can come from working together include:

• Expanded geographic reach – An easier way to enter new geographic markets is to partner with MGAs and PAs that are already doing business there.
• Expanded products and services – Insurers can focus on their core products while adding to their product lines through MGAs.
• Access to new business classes – Insurers get access to niches that might not make sense to pursue on a large scale due to thinner markets, higher risk of exposure, or a lack of experience and marketing depth.
• Access to expertise and industry knowledge – It takes money and time to build profitable products, and partnering or acquiring them can be more cost-effective.
• The ability to offer tailored products – An MGA’s specialized experience allows the insurance company to confidently price its product offering based on a better understanding of the risks and overall market conditions involved in that line of business.

Mitigating Risk

Insurers considering partnering with or acquiring an MGA or PA must be aware of potential risks and exposures, and take steps to mitigate them. These risks and exposures include:

• Control over who is actually doing the work – MGAs or PAs may subcontract substantial portions of the work to perform tasks offshore (i.e., a “fourth party” risk), where different regulations may be driving their behavior. If the insurer is not aware of when this is occurring, risks can multiply.
• Artificial Intelligence Considerations- as artificial intelligence and machine learning become more mainstream as underwriting processes become automated, insurance carriers need comfort that the algorithms that are being used to make underwriting decisions are in alignment with the carrier’s guidelines, and are not discriminatory or potentially violate any applicable Market Conduct guidelines. Carriers need to be informed in a timely manner of any changes in the algorithm used to make underwriting decisions to validate compliance with their rate filings.
• Risk to reputation – Insurers build their businesses and reputation for quality over a long period of years. If their customers are not well-versed and complain publicly (or privately), the insurer can ultimately lose business.
• Reporting issues – Without adequate controls in place at the MGA, as well as effective monitoring and oversight controls by the insurance carrier, the insurer is relying solely on the information provided by the MGA or PA. If there is an inaccurate or late reporting of the results, the insurer’s reporting will in turn be inaccurate and may affect management decisions and potentially the carrier’s financial results.

To mitigate potential costs and exposures, insurers should conduct a thorough due diligence review of the MGA’s operations, information security, and overall strategy  prior to entering into an agreement with an MGA or PA. The insurer’s underwriting or programs department should be involved in the due diligence process, and the finance and accounting, actuarial, claims, and compliance should participate in the decision-making process.  IT security should be involved for multiple reasons, including a data security, cybersecurity, and business continuity perspective.  This is critical if the MGA will be binding business subject to additional state safeguards such as California. 

If the insurer decides to move forward after the initial due diligence by the departments listed above, then a formal financial, controls, and IT due diligence audit should be performed by the carrier’s internal audit department or by a reputable independent firm.

The relationship between the insurer and the MGA or PA is defined in the SLA. A successful SLA defines key provisions, duties, and oversight. It should include such critical terms as a right to an audit clause, access to systems that show underwriting and claims activity and reporting, and the detailed responsibilities of the MGA or PA. The SLA should also clearly spell out key terms like underwriting authority and controls surrounding premium collections, remittances to carriers, authorization of claim payments, and the level of reporting to the insurance carriers.

Further, the SLA should include provisions that define how often insurers can monitor the MGA or PA’s operations and books, as well as a schedule of periodic audits by the insurance company’s internal audit department or by an independent firm.

Moving Forward

Many insurers have found that it’s a good idea to partner with an MGA or PA before buying one. It’s an efficient way to assess whether the agreement is leading to the right volume, includes complimentary products, and aligns with the carrier’s overall strategy. In the right deal, the advantages include more than just growth on both sides – MGAs and PAs also benefit from partnering with or getting acquired by insurance companies via:

• Cheaper Capital – The MGA or PA gets access to much-needed working capital to achieve scale.
• Better financial reputation – The right deal can demonstrate strong financial backing and will reflect the partnering/acquiring company’s credit rating.
• Improved reputation with regulators – The right deal can give regulators greater comfort (by association) of the size and viability of MGAs or PAs.

Acquiring an MGA vs. Partnering

After a typical period of partnering, insurers start to consider ways they can keep 100% of the profits while permanently diversifying their product offerings. In fact, staying separate means the insurer is cutting their profit margin, and also might be giving up even more due to the fact that MGAs can command higher commissions and fees.

If the relationship with the MGA or PA is working well, the next step may be acquisition. Acquiring MGAs or PAs provides insurers with more control over the business being acquired and mitigates any potential non-compliance with the carrier’s filed rate guidelines. Additionally, purchasing the MGA can help build volume and allow the insurer access to niche products their customers may want. The insurer not only gets 100% of the profit, but it also gets greater ownership of more diversified revenue streams.

Conclusion

As insurers look to increase their profits in a time of intense competition, as well as diversity their product offerings and cross-sell into existing customers, partnering with or acquiring an MGA might make sense. MGA products might be the entry point that gets a customer in the door, providing later opportunities to cross-sell other lines of insurance. According to a recent article in IBISWorld, “The ability to cross-sell products into existing customers increases revenue in the short term, but also tends to improve client retention rates, providing a long-term boost to an insurer’s policies in force.”

Thinking about acquiring or partnering with an MGA? You should ask:

• What knowledge does the MGA bring to the table?
• What is its specialty?
• How long has it been writing the class/segment?
• What relationship does it have within the segment?
• What does the MGA provide that is more valuable than markets that you could otherwise access?
• What is the quality of the products and services it offers?
• Are other agents who’ve done business with the MGA satisfied?
• What is their general marketplace reputation?
• What is the MGA’s claim-handling reputation?
• How long has the MGA been writing with the carrier?
• How many carriers has the program been with?
• If the program changed carriers, why?
• Does an agency need to be appointed before submitting business?
• What technology exists to drive ease and overall profitability of doing business?
• How is billing handled? Is it agency billed? Direct billed? What premium finance options exist?
• What other services after the sale does the MGA offer?
• How are claims, loss control, audits, etc., handled?
• How will contracting with the MGA make my operations more efficient and profitable?
• How will my company and policyholder data stay secure?

How Centri Can Help

Looking to an independent firm for specialized services related to evaluating, partnering with, or acquiring an MGA or PA may be the most efficient and thorough solution. Our Insurance industry professionals include results-driven former insurance executives who have broad industry knowledge coupled with deep functional and technical expertise in areas such as internal audit, due diligence  transaction advisory, process optimization, and valuation. Contact us to learn how we can help your organization.