Stable, Attractive MGA Market, Now and in the Future: Conning Report

Managing general agents represent an important access point for insurers interested in specialty markets. It’s also a growing segment. That’s according to a new report by Conning, an investment management company for the insurance industry.

The study – “Managing General Agents: A Look at the MGA Specialists 2014” – marks the first Conning report on the MGA market and examined MGAs, their relationship and business model with agents and insurers, as well as the leading insurers who participate in this market.

The report also analyzed the underwriting performance of a composite group of insurers that generate a meaningful portion of their business from “nonaffiliated MGAs.”

Bill Broomall, analyst at Conning, said the report broke up the MGA market into three areas: affiliated, nonaffiliated and crop. “Affiliated, in our view, are the MGAs that are primarily owned by an insurer,” Broomall said. “Nonaffiliated, we view as the independent MGA market, while crop insurance MGAs are those that are almost exclusively focused on the federal crop insurance program.”

The Conning report estimates direct written premiums for the MGA industry at about $25.7 billion, or about 9.7 percent of the overall commercial lines market. That figure is likely underestimated due to the National Association of Insurance Commissioner’s 5 percent threshold, the report said. Other estimates show the MGA market at closer to $30 billion in premium.

More than 45 percent of 2012 direct premiums came from affiliated MGAs with the remaining 55 percent roughly split evenly between nonaffiliated and crop.

Insurer Failures

Recent financial challenges with some insurers operating through the MGA space have led some to question whether these challenges are signs of more problems to come. But according to Conning, such troubles appear to be isolated events.

“While the MGA market has endured periods of volatility due to their association with a number of insurer failures, the model now appears to be stable due to improvements in risk management practices,” Broomall told Insurance Journal.

According to Broomall, those insurer troubles pushed the market to change.

“The report highlights a number of insurer failures back in the ’90s and early 2000s that represented a catalyst for both the insurers and the MGAs to look at the business model and evaluate what changes needed to be made,” he said.

Many insurers require MGAs to participate in some form in the performance of business underwritten. The two most common risk-sharing options are a sliding scale commission and the assumption of a portion of the premium by a captive (or rent-a-captive) formed by the MGA. Both options require MGAs to have some “skin in the game” and that has led to better performance over time, Conning report said.

“There have been a lot of changes that have been put in place over time that have helped improve the risk management practices within the industry,” Broomall said.

Attractive Market

The Conning report show that insurers remain dedicated to working with MGAs, which has led to steady growth and consistent performance.

“Based on our research, insurers with meaningful relationships with MGAs have remained fairly consistent. The market consists of large global insurers and those insurers with a business model primarily focused on writing or servicing program business,” said Steve Webersen, director of research at Conning.

Insurers of all sizes use MGAs to produce premium, often a more meaningful channel for the small and midsized insurers, Webersen said.

“Our analysis of MGA insurers indicated that as a group they generated direct premium growth above the commercial property/casualty industry in seven of the past 10 years and have also outperformed the commercial market in loss ratio,” Webersen said.

The long-term outlook for the MGA market appears favorable as MGAs remain well-positioned to grow, the report said.

“MGAs willing to incorporate technology and data analytics into their product offering can enhance their value proposition to insurers and hold a competitive advantage over the long term,” Webersen said.

Part of the attractiveness of the MGA market is the specialty model.

“A lot of MGAs focus on certain lines of business or geographies and their ability to offer value through this specialist model has the potential to help drive long-term growth.”

Broomall says the industry has seen consistency among the largest insurers using MGAs. That’s because “insurers understand that to attract quality MGAs you need to provide a consistent market.”

“That’s one reason why there’s not much movement when it comes to the largest insurers utilizing MGAs. They understand that the industry is going to have its ups and downs, peaks and valleys. But over time, the MGA market is attractive.”