Insurance companies write policies directly in areas where they can achieve volume and have the knowledge and experience to make effective underwriting decisions. Large 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 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 to 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; however, they may look to expand their coverage into other regions or territories where the MGA has a strong network of brokers. When an insurer works through an MGA, the MGA performs such functions as subcontracting with independent agents for placement of business, negotiating commissions, handling claims, issuing policies, processing endorsements, collecting policy premiums, or being responsible for completion of regulatory reports for state or federal agencies.
Insurance companies don’t usually own 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 business agreement. In these types of arrangements, premium and commission terms can vary; however, the premium is generally a 75/25 split, with 75% of the premium going to the insurer (who takes on 100% of the risk) and 25% going to the PA or MGA.
In a recent interview with Rough Notes
magazine, Mike Schofield, president and CEO of insurance agency MiniCo, said, “There are many, many classes mainstream carriers don’t have an appetite for.” He also notes: “The agent can access a heightened level of expertise through MGA programs. Expertise and focus add significant value. Many times, products the retailer can offer through an MGA are actually enhanced, because of these specialty coverages.1
Some examples of policies where the average insurance company wouldn’t necessarily have an established line could include such things as fine instruments, highend vessels, construction, and high-value possessions like jewelry or fine art.
A celebrity’s legs have been insured more than once
Every few decades, a movie or television studio gets the idea to insure a pretty celebrity’s legs. In the 1940s, it was Betty Grable. In the 1970s, it was Suzanne Somers. Recently it was Taylor Swift — in a recent article in the New York Daily News
, it was reported that she is insuring her legs for $40 million, saying “the singer has reportedly taken extreme measures to make sure that she doesn’t lose everything if she was unable to dance on stage.2
MGA and PA activity is increasing
Insurance companies are 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. A recent InsuranceNewsNet.com
article reported on an industry study by Conning & Co., saying: “Fixed-income portfolios have been hurt by low rates, declining property-catastrophe rates and too much insurance supply relative to demand. As a result, property/casualty carriers in the hunt for new premium dollars welcome the profitability that comes with the specialty underwriting skills that MGAs bring.3
Grant Thornton LLP believes the pace is increasing for several additional reasons, including:
It’s a good time to be doing acquisitions. Low interest rates mean insurance companies can acquire specialized types of business at a relatively cheap price.
These products can be more profitable. Adding these higher profits to a property and casualty insurer’s bottom line is important in times of heavy price competition in traditional markets.
People are doing better economically. Customers have rebounded along with the economy and are buying bigger-ticket items that need to be insured.
Using MGAs to expand
A Grant Thornton insurance client expanded their property and casualty line of business by insuring high-value homeowners (HVHO) through program administration agreements with several MGAs. The client was seeing favorable loss ratios in their HVHO line of business, so they considered expanding their footprint. This client’s MGAs have traditionally issued HVHO policies in coastal states such as Florida, North Carolina and South Carolina, but over the past two years they have engaged us to perform due diligence reviews of additional MGAs and PAs into other geographic areas such as Alabama, Massachusetts, New Jersey and Rhode Island. We are also seeing this trend with other clients and expect this to continue, especially as insurance companies look to grow their books through diversification into nontraditional lines of business.
MGA and PA premium growth is outpacing traditional insurance lines. According to a piece in InsuranceNewsNet.com
, MGAs have had higher premium growth than property/casualty over the past 7 to 10 years, outpacing the broader market by 5.1 points in total. “Over the past 10 years MGA combined ratios have also been 6.7 points lower on average than that of the broader property/casualty,” the Conning & Co. report said.4
Combined ratios are a measure of an insurer’s profitability, taking the sum of incurred losses and operating expenses measured as a percentage of earned premiums, with lower combined ratios indicating higher profitability.
Insurance industry M&A activity was extremely busy in 2014. According to M&A advisory firm MarshBerry5
, there were 220 acquisitions in 2014 for the total U.S. broker sector, with 49 of them in the much smaller sector of wholesale brokers and MGAs and managing general underwriters. This disproportionate amount of wholesale deals (22% of the deals being made by a small percentage of the industry) demonstrates that this sector is very active. Some examples include:
In 2015, American International Group acquired a controlling stake in NSM Insurance Group.
In 2015, Arthur J. Gallagher (AJG) acquired UK MGA Evolution Underwriting Group.
In 2014, Capita Insurance Services completed a transaction to finance the startup of Pardus Holdings by taking a minority stake.
In 2014, AJG acquired Florida-based MGA Insurance Group.
In 2013, AmWINS Group acquired Gresham & Associates, an MGA that placed $340 million in premiums in 2012.
In 2012, RLI Corp. bought Rockbridge Underwriting Agency, a specialty medical malpractice MGA.
In 2012, AmTrust Financial Services bought California-based Builders & Tradesmen’s Insurance Services, not long after AmTrust said it was buying the workers’ compensation business of CardinalComp, a disability insurer with more than $90 million in annual premiums.
In 2011, broker Brown & Brown bought Arrowhead General Insurance for $400 million.
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 it 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 involved in that line of business; also, a tailored product will meet a customer’s specific needs.
After Grant Thornton performed a due diligence review, our client executed a services agreement with an MGA. Using their networks and relationships, the client explored writing general liability insurance for fire suppression and roofing contractors. Since the MGA is licensed in all 50 states and has a deep network of brokers, our client was able to quickly execute business in multiple geographic areas. The partnership allowed the client to expand its products and services, and increase its premium revenues from this one partnership by approximately $4 million. The MGA is now forecasted to generate net premiums of more than $6 million in 2016.
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 or perform tasks offshore, where different regulations may be driving their behavior. If the insurer is not aware of when this is occurring, risks can multiply.
Risk to reputation. Insurers build their business and reputation for quality over a long period of years. If their customers are not well-served and complain publicly (or privately), the insurer can ultimately lose business.
Reporting issues. Without adequate controls in place at the MGA as well as 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 inaccurate or late reporting of results, the insurer’s reporting will in turn be inaccurate and may affect management decisions.
To mitigate potential costs and exposures, insurers should conduct a thorough due diligence review 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 departments should participate in the decision-making process.
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 an 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 limits and 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 and how often insurers can monitor the MGA or PA’s operations and books, and it should include a schedule of periodic audits by the insurance company’s internal audit department or by an independent firm.
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 and includes complementary products. 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.
Customers may benefit too. In a recent interview in Risk & Insurance
magazine, Scott Burton, a partner with Sutherland, Asbill & Brennan in Atlanta, said, “Ultimately, the effects of consolidation on resulting scale and the continued gains in efficiency and
expertise should result in better rates and terms for many clients.6
Acquiring an MGA versus 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 by the percentage of the split, 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 that’s being acquired, plus purchasing the MGA can help build volume and allows the insurer to offer 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.
Acquiring can appeal to both sides of the transaction
A Grant Thornton client saw an opportunity to acquire an MGA that they had previously engaged to sell a specialized type of health care coverage. The MGA was a startup operation and, as they began to rapidly grow, they did not have the organizational structure to continue to grow organically. Our client has the expertise to support operations and back-office functions in order to allow the management to focus on the continued growth of the business.
As insurers look to increase their profits in a time of intense competition, as well as diversify their product offerings and cross-sell to 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 7
, “The ability to cross-sell products to 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? According to Rough Notes magazine, these are some of the questions you should be asking8:
What knowledge does the MGA bring to the table?
What is its specialty?
How long has it been writing the class/segment?
What relationships 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 product 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 has changed carriers, why?
Does an agency need to be appointed before submitting business?
What technology exists to drive ease 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 Grant Thornton LLP 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 professionals include results-driven former insurance executives who have broad industry knowledge coupled with deep functional and technical experience in such areas as:
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