Broker Times: Survival of the fittest

Managing general agencies (MGAs) continue to divide the insurance industry and provoke heated debate. For some they are an essential business model, providing both brokers and insurers with a quick route to specialist markets.

But others believe they are little more than unnecessary middlemen, leaking value from the supply chain and pushing up costs. In recent months, it seemed the second viewpoint held sway, as insurance giants Aviva and AXA shed their MGA relationships. AXA chief executive Philippe Maso appeared to ring the death knell when he told Insurance Times earlier this year that MGAs were designed for a different economic climate, leaving many to speculate whether they could survive the recession.

But since then there has been a revival of interest in this model, as numerous brokers defy gloomy forecasts to expand or set up MGAs. The resurgence was led by insurer Fortis, which has taken over from AXA as capacity provider for Primary and has signed a major five-year deal with broker Kerry London to provide capacity for a new MGA.

Meanwhile, consolidator Giles is expanding its underwriting agency, Ink Underwriting, with an ambitious target of £300m gross written premium (GWP) by 2011, and Jardine Lloyd Thompson has plans to launch MGA Thistle worldwide, with a target of £100m GWP within the same time frame.

Cooper Gay and Barbon Insurance Group have also plunged into the MGA market in recent months, while Oval, Willis and Marsh continue to test the waters.

But the challenges are many. In addition to trying to battle the lukewarm reaction of some of the bigger insurers, this new breed of consolidator-led MGAs have to compete against the well-established traditional underwriting agencies, such as Evolution, APC Underwriting and Arista.

Managing director Chris Butcher of FSJ Broking, the wholesale broking division of Cooper Gay, believes there are several advantages for a broker setting up an MGA.

“We can provide agreed service levels that are within our control and we are therefore less reliant on the insurance carriers. Having an MGA or appropriate facility in place will reduce costs when compared with placing individual risks into the open market.”

Towergate Underwriting group chief executive Clive Nathan is also clear on the benefits. “There are several advantages: it gives us control over the process, the underwriting and the claims.”

However, he cautions that setting up a successful MGA requires a substantial investment; one that few brokers can afford. “The key point is that it is quite easy to talk about setting up an MGA but to actually do it and do it properly is a significant undertaking.

“We have over 700 people doing underwriting in Towergate. We have a pricing and actuarial team, an audit team, and a significant claims team. This is an example of the type of infrastructure you have to build to set up an actual MGA, or virtual insurer as we like to call it. If a broker is going to establish an MGA they have to think about whether they are willing to make the sort of investment in infrastructure that will support it,” he adds.

Despite the lukewarm response of some insurers toward MGAs, others including NIG, QBE, Allianz, Equity, Fortis, Groupama and Brit Insurance remain loyal. Fortis managing director Mark Cliff says MGAs can save insurers time and money.

“Obviously, the advantage for us is that we can develop specialism and expertise in certain areas. Kerry London is a good example with regard to leisure. We can work to get a strong position in a market segment that would have taken us far longer to recruit expertise in order to deal with that.”

Allianz head of property and casualty Steve Coates says that MGAs will whet the appetite of insurers if they continue to offer a valuable contribution to the supply chain. “[MGAs] can understand the changes within that market segment a lot quicker than an insurance company, which has to deal with the broad spectrum of industry. From an insurance perspective, we are happy to support MGAs where they can offer expertise, which is why niches are better.”

Know the limits

Coates adds that the scope of insurers’ support is not limitless, however. “We see MGAs as being part of our overall proposition, so we need to manage how many of them we can support. But you couldn’t support too many MGAs; it would be difficult to control how many Allianz products are out in the market.”

Meanwhile, other players in the industry question the value of the consolidator-led model compared with traditional delegated authorities in Lloyd’s. Evolution chief executive Paul Upton says there may be a conflict of interest when it comes to big broker-led MGAs’ relationships with smaller brokers. “If they go with Towergate or Giles, they are just supporting a competitor, aren’t they?”

He adds that MGAs have to be highly selective when it comes to pricing risks, which consolidator-led MGAs cannot afford to do.

“An MGA like us is driven entirely by underwriting profit … but a consolidator has got a completely different model. It is driven by volume.”

SSP’s Keychoice Underwriting managing director Jonathan Davey agrees that brokers have to tread carefully. “There is always a possible conflict with brokers launching MGAs. Morally and legally, an MGA’s duty of care is to the insurer, and a broker’s is to its clients. This makes profit versus price a continuous conflict and any ‘broker turned underwriter’ will have to make this clear and deliver against its duty of care.”

But Nathan argues that consolidator-led MGAs such as Towergate offer some significant advantages compared with some of their more traditional rivals.

“A traditional binding authority might be quite limited in its authority, whereas some of our underwriting zones have significant authority over claims, over underwriting, pricing and the way that ultimate loss ratios are established.”

“A traditional underwriting authority is by its nature only going to be able to have a small underwriting window.” he adds. He also rubbishes suggestions of a conflict of interest. “We have clear delineation between our broking operation and our underwriting operation. We wouldn’t have built up £600m in premiums – 60% of which comes from non-Towergate brokers – if we weren’t able to give the service and access to specialism those external brokers wanted.”

Best of both worlds

So how do both models help smaller brokers expand in an increasingly cutthroat marketplace? Butcher believes that MGAs enable brokers to access selected specialist business and can provide an exclusive market for certain risks.

“This allows us to provide a specialist underwriting approach in areas not currently served by the mainstream market. Having the capabilities of an MGA within the business also enables us to take ownership of service delivery to the client base, in this case the retail broker,” he says.

Plum Underwriting technical director David Whittaker hails the advantages for smaller players. “The benefits to the smaller broker are that they tend to get access to decision makers in an MGA more easily than in an insurance company. The MGAs tend to be quicker to market new products, they are responsive to brokers’ demands and are more nimble in their response to the broker market.”

Davey adds that MGAs have helped to re-establish worthwhile business relationships in the marketplace. “It is a fact that many UK MGAs were set up to fill the service vacuum left by some mainstream markets in dealing with the smaller broker. These brokers can benefit significantly by building positive relationships with MGAs and get back to dealing with people again and not call centres,” he says.

“In addition to specialist underwriting experience, the majority of brokers still place flexibility and service at the top of their wish list. Given that most MGAs are smaller and have modern technology, they are more than capable of competing effectively against the major insurers.”

All agree that differentiation remains the key ingredient for success when it comes to forming MGAs. But Nathan says this does not need to focus on a particular niche product: it could be a focused around risk management or a particular type of policy. Being a smaller business doesn’t mean only operating in small areas. You can operate in quite a big area and still create a niche for yourself, he says.

Upton stands by this approach. “Our niche is that we get business from larger companies that don’t have a distribution network. You have to have a niche, but ours is a distribution niche, not necessarily a product niche.”

So what does the future hold for this model? “In two years, you should have a core group of independent MGAs,” Upton says.

“The best ones will still be there. I suspect that some of the broker ones will not be about. I just don’t see that model working. I don’t think that many brokers would consolidate with an MGA out of choice.”

Nathan also believes the rising tide of new MGAs will be stemmed. “I think there will be a short-term growth and long-term shrinkage as both brokers and insurers realise that you need to invest heavily in order to create a fully fledged and fully operating MGA.”

Coates adds: “I think there have been a lot of people talking them up in 2009 who perhaps have realised what it would mean in infrastructure and cost. I’m not sure you will see too many in the commercial market.”

It seems that while opinion remains divided about the value of MGAs and the strengths and weaknesses of the different models within that market, all agree that – for the players determined to make it work – the stage is set for a showdown. IT