Briefing: The rise of alternative capacity providers certainly benefits MGAs, but where does it leave insurers?

By Yiannis Kotoulas

In the insurance market, an MGA acts as an underwriting extension of its capacity provider, forging a partnership that allows the financier to access niche or specialty markets.

Traditionally, these capital providers have been insurers – organisations that understand the market, underwriting and risk – looking to leverage the expertise and adaptability of the MGA model to delegate a portion of their own underwriting by delegating control of some of their capital, known as providing capacity. 

But, as the prominence of MGAs grows, their potential for strong profitability has caught the eye of alternative capacity providers with designs on entering the ever-desirable insurance market. 

In its MGAs: A market on the move report, published in March 2022, Aon explained: ”The growth in written premiums and the number of policies generated by the MGA sector exemplifies the attractiveness of MGAs to existing capacity providers, with more capital supporting MGAs than ever before.”

However, it added that “new sources of capacity [have] emerged”, with the trend of alternative capacity providers accessing the insurance market “expected to continue”. 

Speaking at the MGAA Conference earlier this month (10 July 2024), Brown and Brown president and chief executive Powell Brown told delegates that his firm’s MGA was already fielding interest from these sorts of financial institutions. 

”You’re going to see pension plans and you’re going to have private equity as well as sovereign wealth funds [enter the market],” he said. 

”But what’s to say that a large bank like Barclays or Standard Chartered doesn’t want to come and invest in insurance? Not invest as in buy stock, but give us capacity via a front that would allow us to underwrite on their behalf. 

“The answer is that this is here today, not yet with banks, but with other capital providers and capital institutions. This creates enormous opportunity for anyone in the delegated underwriting space, assuming that you’re profitable.”

So, as we observe the budding trend of these new entrants to the market, how are MGAs responding – and where does this leave insurers? 

Horses for courses

As might be expected for a section of the market where capacity is king, anything that provides more capital and increased diversity of that capital’s origins is incredibly welcome for MGAs. 

More choice allows MGAs to more easily identify and partner with suitable capacity providers, while more capacity allows them to both serve more customers and earn more themselves. 

Mike Keating, chief executive at the Managing General Agents’ Association (MGAA), echoed Brown’s comments. He told Insurance Times: ”Greater access to capital for MGAs, in whatever form, is obviously going to be a real plus point for them. 

”As an MGA, you would want to be aware of the emergence of alternative capital models and they could work within your business model, your risk appetite, underwriting, pricing and the fabric of your portfolio.” 

In addition to the simple advantage of more choice, the fact that alternative capacity providers are not insurers provides its own plus points. 

Keating explained: ”Alternative capital tends to be able to move on decision-making a little bit quicker than traditional capital, which can lead to quickly agreeing deals and far quicker onboarding, as well as more agility and innovation around financial engineering, particularly around the treatment of reinsurance.” 

Legacy advantages

One could easily imagine a future where MGAs provide the easy route into insurance for a whole raft of capacity providers, leaving insurers to either compete with heavily, alternatively financed MGAs or become just one part of the capacity provider cocktail. 

But, for this to happen, it would have to be the case that there were no advantages for MGAs in continuing to work with insurers, which is not quite true. 

For one, insurers obviously understand the business of insurance and can demonstrate their commitment to the market by the simple fact of their often long existences. 

Keating noted: ”When you look at the traditional insurer model, you’ve got real longevity and lots of experience in providing MGAs with capital, as well as the trust in a strong balance sheet.

”Insurers can quite easily demonstrate to MGAs that they’re in it for the long haul, even through the cyclical nature of the markets, because they have been. In terms of alternative capital, we’re in the quite early stages and they can’t just accelerate history.”

Additionally, it’s not like insurers will stand still and allow themselves to be pushed out of the underwriting arena. New blood in the insurance market should have the impact of causing insurers to innovate their own processes, to keep pace and remain relevant. 

Alternative capacity providers are sure to eventually pile into the MGA market, especially if the model continues to be able to demonstrate returns. 

However, this is unlikely to brush aside the the old guard. The world’s largest insurers all share the defining features of adaptability and historical resilience – and while the future may look different, insurers are sure to be part of it.