Broker-owned MGAs - a conflict of interest?

Markerstudy’s move to create the UK’s largest MGA comes amid the controversy of whether broker-owned MGAs pose an unresolvable conflict of interest.

Group underwriting director Gary Humphreys is looking to ease these fears by insisting the group’s MGAs have always put the customer first and will continue to do so through newly formed Markerstudy Insurance Services Ltd (MISL), created from the consolidation of the group’s three MGAs.

But broker-owned MGAs is an ongoing area of interest for the FCA, which has previously conducted a thematic review on the issue.

A 2014 FCA report expressed concerns that conflicts of interest were not being mitigated, increasing the likelihood “that individual broking and placement decisions are made in the interests of the firm rather than their customers”.

And the formation of MISL, and Humphreys’ hopes it will hit £1bn GWP by 2021, again raises the debate of whether brokers should be allowed to own their own MGAs.

Industry reputation

Jon Holm, executive of MGA investments at Asta, accepts that many brokers which own an MGA separate the two lines of business very well and that their customers do not lose out.

But he says just the fact brokers can own their own MGAs is bad for the reputation of the industry, and affects the client’s confidence that the broker is getting them best deal.

He said: “The broker should be getting you the best price in the market and the best deal for the policyholder, but when they own their own MGA can you be certain of that? It’s that uncertainty which is the issue.

“You could almost argue, should brokers be allowed to own MGAs?  Because if they didn’t there would be no issue at all.”

If brokers are allowed to own MGAs, Holm says more stringent regulations are required.

He added: “My concern is how good brokers are at managing their conflicts of interest. There are brokers who operate their companies well, there are those that manage them okay and there are those less okay.

“What will the broker get from the MGA by way of commission? Will they get a higher commission?

“It all begs questions that are unhealthy in an insurance market that is already seen in a very poor light by the general public.

“Why put yourself in a position where you could reduce your perception even more.”

However, there are often good reasons for why brokers establish their own MGAs.

Niche

“You have to bear in mind that most MGAs that get formed in the broker market are mainly because that broker has a particular niche that they are looking to provide a product for that the existing market can’t service properly,” explains Humphreys.

“In recent years a lack of both appetite and capacity among mainstream insurers in certain niches has led to the growth in MGAs.”

And what’s more Humphreys says it is in the interest of broker and MGA to maintain a degree of separation.

He added: “We’ve always maintained a pretty strong Chinese wall because if you’re a broker with an MGA and you suddenly start selecting against the rest of your panel you’re not going to last very long.

“Then you’d end up having to put other business into the MGA that might not have been a part of the original plan.

“Some brokers have been caught out in the past by becoming overly reliant on their own in-house MGA.

“That’s not really the best outcome for them or the MGA side of the business, so you do have to think if you’re a broker you do need to have a clear product set that fits with the MGA and how that works alongside the rest of your supporting panel.

“You don’t want it just to become a dumping ground for the business no one else wants.”

Markerstudy will continue to deal with external MGAs, and other brokers will pass on their own MGA to deal with MISL. Within Markerstudy’s retail division the group’s MGAs currently make up less than a fifth of it’s total GWP.

Brokers in disguise

And MGAA chairman Charles Manchester says providing MGAs operate “in a ring-fenced business environment” there is nothing wrong with being broker-owned.

But while accepting there are well-run broker-owned MGAs, Manchester still has concerns.

He said: “There is no question that there are some MGAs that operate more as “brokers in disguise”, taking a second slice of the premium in the softest of soft markets whilst insurers backing them look the other way.

“I don’t understand how they manage their conflicts of interest, where the MGA owes its principal duty to the insurer whilst the broker owes its duty to its customer.

“How the insurers expect to make money in that situation is beyond me and clearly, if they do, you’ve got to question if it’s in the customers’ interests.”

But Humphreys says it is market forces that will decide where business is placed, and that providing everyone on both sides of the deal is comfortable with the relationship, there is no issue.

He added: “We’re in a mature market now where all insurers have relationships with MGAs, with direct arms, and with broking arms, which potentially do compete with each other on the face of it. But in reality, market forces dictate where the business goes.”