Size matters in MGA market

What is going on with managing general agencies? One minute Gallagher-owned OIM is signing a £375m premium capacity deal with RSA, and the next day another MGA, Affinity Insurance Management, is selling up because capacity provider Munich Re is hiking liability rates by 25%.

What is emerging is a picture of smaller MGA struggling, while larger ones seemingly thrive.

Smaller MGAs have several problems that their larger counterparts do not have. For example, many have few capacity providers, which means they are at risk if their provider raises rates or pulls capacity.

Evolution Underwriting chief executive Paul Upton says: “You have to have a spread of arrangements. If you have one capacity provider, the market turns and that provider decides to take a very hard line view on MGAs, then you’re in trouble.

“There is vulnerability there, but if you’ve got the market reputation, relationships and systems to deliver multiple carrier binders across a range of businesses, you can build that assurance for yourself.”

Regulation is also a big burden for smaller MGAs. The biggest regulatory cost by far is the Financial Services Compensation Scheme (FSCS) levy, which is onerous for smaller players.

Managing General Agents’ Association chairman Reg Brown adds that smaller MGAs also have to contend with all the woes of running a small business, such as employment law and recruitment issues.

Start-up MGAs are in an especially difficult position. Upton says: “If you’re coming from a zero premium base, it’s very difficult to overcome your fixed costs quickly, because you’re having to write premium at sub-standard prices, and that puts your results at risk.”

The bigger the better

For larger MGAs, such as Towergate Underwriting, it is totally different picture.

At first glance, the bigger MGAs seem to be much healthier than their smaller cousins. For a start, the bigger players often find it easier to sign up capacity.

UK General Insurance Group managing director Michael Warren says: “If you’re comparing a large MGA with a smaller generalist MGA, you’d expect the larger to get a better capacity deal because the insurer will find the volume attractive, as long as it’s profitable.”

There have certainly been enough big deals recently to back this up, and RSA seems particularly keen.

In the last three months, Towergate Underwriting signed a capacity deal with RSA worth £1.25bn over five years, while Gallagher’s MGA OIM signed a deal worth £375m over the same period.

RSA director of MGAs and delegated schemes Tom Downey says the insurer wanted its MGAs to bolster the sort of business RSA would normally write.

He admits there is a potential conflict of interest with pricing, but that RSA avoids it. He adds: “What we’re not about is trying to undercut our MGAs, or our MGAs to undercut us. We like to have a blended portfolio which replicates our UK wide portfolio.”

The insurer preference for profit over distribution from MGAs is another factor that tends to benefit larger MGAs over their smaller rivals that lack the economy of scale.

Upton says: “I think about five years ago there was a definite buzz about distribution. Distribution for the sake of it was the absolute mantra. My view now is that there is much more emphasis on long-term sustainable profitability.”

Upton adds that larger MGAs can also snare more business through brokers by having lots of people on the road meeting intermediaries and having larger marketing budgets.

Under fire

Despite their strengths, however, large MGA are not bulletproof - as AXA demonstrated when it pulled out of Primary Group two years ago.

Aviva joined AXA by starting to withdraw capacity from big MGAs from 2008, owing to worries about high commission levels and their books being cannibalised.

Primary, part of a rebranded UK General Insurance Group, is back on secure footing with Ageas as a main partner, although it now supplies its own capacity in a hybrid partnership.

Warren thinks that larger MGAs will keep falling in and out of favour with insurer boards.

He says: “History tells us that they all go in cycles, depending on which management team is brought in next at large insurers. Strategy changes as a new team comes in.”

Another issue for larger MGAs hinges on the expenses paid by insurers. When insurers draw up a business case to back an MGA, they factor in very low expenses rates for themselves on the basis that the MGA will take some of their cost away by handling the underwriting and distribution.

Williams says that insurers often end up spending more than they expected on expenses, especially when signing deals with larger MGAs. He says: “I think it’s anyone and everyone to a degree, but it’s been more pronounced at the larger end because they drive a harder bargain.”

This doubling-up of cost can happen in areas such as distribution, product development and underwriting.

It is a common problem, and often leads to accusations that MGAs cannot deliver value to insurers.

However, Warren says: “When you hear that from a capacity provider, it often means that they don’t know how to manage the MGA relationship and they duplicate the cost, simple as that.”

Whatever the debate over expenses costs, it’s clear that larger MGAs, although they may not be as challenged as smaller underwriting agencies, will have to fight hard to justify their existence to their insurer partners.