MGAs: is it the end of the line?

When AXA and Norwich Union line up against you in public, you know you’re in trouble. And that’s exactly what has happened to managing general agencies (MGAs) in the past six months. As the country has hurtled into recession and the market has finally shown signs of hardening, NU, AXA and other major composites have turned on the middlemen in an attempt to cut their distribution costs and regain control of their relationships with brokers.

So is it really the end of the line for MGAs?

While some market commentators believe the broker-led MGAs were always doomed to fail, others argue that there are some sustainable models out there. Chris Giles for one has revealed plans this week to expand his retail MGA business following the end of its relationship with NU.

And Oval is in discussions with a number of insurers about setting up an MGA.

MGAs flourished in the soft market because they were a means of widening distribution and gaining market share, even at the expense of profit. They offered the generalist insurers a route to niche, specialised business. Canny brokers saw an opportunity to raise their commission levels by taking the pen and many seized the chance. Giles, for example, bought Ink Underwriting in June 2007. The globals were keen to get in on the action too, with Willis outlining plans for an MGA and Marsh hinting it might get involved.

JLT has announced plans to launch an MGA called Thistle and THB set up Unicorn last year.

Since then, it’s gone very quiet. This lack of activity reflects a changing mood among the largest insurers. Igal Mayer, chief executive of NU, and Philippe Maso, his counterpart at AXA, have made no secret of their distaste for MGAs. NU will stop providing capacity to Ink from the end of this year and is reviewing its arrangement with Primary. AXA will stop working with Primary at the end of this month.

Last month, Maso told Insurance Times: “I don’t believe the model functions well. It can have legs when we talk about niche products of specific segments of the market, where it doesn’t make sense for an insurer to build the capability. But an MGA takes the risk on behalf of someone who is going to carry the can. Not a lot of industries do this. It’s like in the music industry, if you were a big label and someone chooses the next big band for you. If it doesn’t work, he gets his fee anyway and goes off to the Bahamas.”

Other MGAs insist they have a more sustainable model. Chris Giles plans to rename and expand the retail element of Ink, building it up to a £30m gross written premium business within three years, and passing 40% of his book through it. Giles says that although larger insurers may not want to play, there are smaller companies looking for a distribution platform. Since NU’s decision to depart at the end of 2009, revealed last week, Giles says he has signed up a number of UK insurers to provide capacity.

“I believe the way forward is for insurers who have a lighter footprint in the UK and who are looking to develop relationships with a smaller number of bigger brokers, they’re the insurers we want to be aligned with,” he says.

Meanwhile, Willis has quietly launched its underwriting business and says it is on track, with plans to grow. Brendan McManus, UK chief executive, says: “A lot of MGA models have relied on carriers being prepared to operate at a marginal rate of return. When the market changes that becomes a sub-marginal rate very quickly.

To make this model work, it has to be based on delivering a superior proposition to the client.”

James Gerry, chief executive of the JLT-owned agency Thistle, insists there is still a place for MGAs that use their expertise – for example, in technology – to cut operational costs, saving insurers money. He says Thistle will base insurer relationships on taking a cut of underwriting profit, rather than driving up commissions at the front end. “If my carriers don’t make any money,

I don’t make any money,” he says.

“The problem in my mind is that brokers and consolidators looked at this without bringing in efficiencies. They have been lazy and jacked up the commissions to unsustainable levels – the model was never going to work at those levels.

I’m pleased the market is waking up to the fact that these models are not sustainable.”

There is no set date for the launch of Thistle, but Gerry insists this is not related to the economy or the insurer view of MGAs. He says the company is in the final stages of developing and testing its electronic systems, which are designed to cut operating costs and therefore central to the business model. A soft launch can be expected in the near future, he adds, and although he declines to name Thistle’s carriers, he says they will be drawn from Lloyd’s and the London market.

Underwriting is the engine

Like Gerry, James Truscott, managing director of THB’s Unicorn, believes an underwriting-driven MGA is well placed to survive. “As with any form of distribution solution, the MGA model has several different variations,” he says.

“Our view is that capacity providers will always value true expertise in the trade, product or class distribution capability. We run Unicorn as a dedicated and quite separate underwriting business and we employ underwriters with strong reputations in their products. This is very different to the broker scheme model where volume and commission seem to be the sole drivers. It is likely that the latter will suffer as the market hardens unless they deliver long-term technical profits and better rates of return.”

So what of Towergate, the arch-consolidator that derives about 50% of its profit from its underwriting business? Towergate made headlines last spring when it was renegotiating deals with major composites including RSA, NU and AXA. The talks became rather tense and some of the drama was played out in the press. In the end, RSA continued to provide capacity while NU and AXA came off the panel – though AXA continues to work with other parts of Towergate.

Clive Nathan, chief executive of Towergate’s underwriting arm, insists the business is flourishing and capacity is over-subscribed. He agrees that the key to a successful MGA is strong underwriting. “It’s about managing underwriting expertise, having good data, good operational processes and employing good underwriters. You have to spend a lot of money to do that, and I’m not convinced some other MGAs have done so.”

Primary Group, meanwhile, has been looking to sign up new partners following AXA’s departure as major capacity provider and doubts over the future of its relationship with NU. A Primary spokesman refused to comment for this piece, but market speculation suggests Fortis and Great Lakes as replacements. This typifies what is likely to happen to those MGAs that survive: while major composites become more reluctant to offer capacity, smaller players, Lloyd’s underwriters and even reinsurers are set to move in.

Insurers that still have an appetite for MGAs include NIG, QBE, Allianz, Equity, Fortis, Groupama and Brit. RSA also continues to play, following a review of all its relationships 18 months ago. Paul Donaldson, the insurer’s commercial managing director, says: “MGAs are here to stay. We have a set of golden rules we apply when we are looking at opportunities. The key to it is getting the right returns and having the right controls over any authority we delegate, and we’re happy with that.” He adds, however: “We haven’t got tons of them anyway – that’s finished.”

Even those insurers that have spoken out against MGAs maintain a number of significant relationships. Both AXA and NU have arrangements where they see value, although they prefer not to shout about them.

So MGAs have not quite come to the end of the tracks, it seems. But as the journey gets rockier, a few of the less stable may fall off along the way.