The Future of Insurance Belongs to Intermediaries

Great efforts have been made recently to disintermediate the insurance process. One prevalent example of this is by routing insureds directly to the carrier, bypassing the independent agency distribution channel.

More and more companies continue to jump on the direct-to-consumer bandwagon, joining Coverhound, Insureon, Coverwallet, and IVANS to name a few, some even moving their sites beyond merely a lead generating tool, and integrating product and pricing with a few extra clicks.

While innovation is always a driving force for any industry, the reality is, the future of commercial insurance belongs to the intermediaries. MGAs write some $40 billion in gross annual premiums, with roughly half writing more than $100 million annually.

Intermediaries like an MGA have several distinct advantages over the other business models competing in the insurance mechanism. The advantages are not just significant, but impossible to compete with.

Distribution and Products

MGAs bring distribution into the risk transfer chain. It’s not unusual for them to have thousands of appointed retail agents nationwide, or regionally – sometimes thousands in some of the larger states, like California or Texas. When smaller shops are unable to represent a particular carrier because of their limited size, they rely on an intermediary who can provide access to that product for the insured. With size and capitalization, it’s easy for MGAs to obtain appointments with insurance carriers.

While the old model of MGA thinking touted control of distribution, that was just one side of the coin. The new model is acting like an insurance company.

Combine distribution with product, and you have a winning strategy. MGAs bring product to the insurance transaction. The number of carrier relationships varies. An MGA with a specialty mindset focuses on one line of business and typically works with between five and eight carriers.

However, some MGAs that are operating from a generalist mindset can represent 40 or more insurance companies. This breadth of product offers a vast suite of coverage solutions to their agency distribution plant.

Program Business

Let’s now take the evolution of product one step further and discuss program business. When an MGA has distribution, sizable premiums in certain niches, can demonstrate underwriting expertise in writing certain classes, and has a technology platform to support all steps in the insurance process, carriers become open to extending actual underwriting authority to the wholesaler.

The ultimate form of authority is a program manager at the MGA who “holds the pen.” In this scenario, the MGA is now operating as an MGU with full delegated underwriting authority. In a business world trying to excite customers about a product and drive traffic to the point of sale, the MGA does the opposite. They design product to fit the customer need.

It seems like a revolutionary concept in today’s business world. However, this is the true reason a company should be in business – putting the horse in front of the cart. Now the stage is set.

The MGA has control of the customer front-end, the coverage underwriting middle, and avoids the back-end claims, paid by the fronting carrier or their reinsurers.

This is a smart and profitable combination: Lots of submissions and minimal interjection by the carrier. The application hopper is full and the quotes are cranked out quickly, without having to bounce back-and-forth between the retail agent and carrier underwriter.

Where underwriting expertise was the top priority for a MGAs five years ago, underwriting responsiveness is king today. Program business is the surest way to enable being the first proposal back to the agent, providing a substantial competitive advantage over the other guys waiting on that brokered quote to come back from the open market. This strategy makes it easy to define a value proposition to your customer.

The MGA program manager is incentivized to build a book of profitable program business, and averse to writing accounts that will negatively impact the loss ratio and overall performance of the program.

At this stage, the MGA has essentially become the insurance carrier, without the balance sheet. The MGA then involves a third-party administrator for claims handling, to have input into claims determinations, but inevitably, a loss results in a payout – not paid by the MGA, but the carrier.

In the intermediary world, money comes in, no money goes out. Of course money goes out for expenses, just not for losses.

Focus on Revenue

Lastly, let’s talk about how MGAs make money.

The agency-billed policy premiums ultimately go to the carrier. Whoever is on the hook for paying the claims, collects the premium. No way around that.

That makes MGAs revenue-focused, not premium-driven. They earn a commission just like any agent does for their services, as well as fees for additional services like inspections. The commission is a fraction of the premium, but predictable, with no risk.

This reduces volatility, taking the mystery out of the MGA’s bottom line, and makes quarter-to-quarter financial reporting quite predictable. And this equates to very little financial risk.

Any risk manager will tell you reduced volatility brings a peaceful night’s rest, so this is a big advantage over the carrier, which most of the time relies on float and investment income to bring the company’s performance into the black. Not so with an intermediary, such as an MGA.

The intermediary enjoys the best of all worlds, while avoiding many of the downsides. Worried about a brush fire, hurricane or hail storm? Not the MGA.

If you look at the various risk management techniques available to businesses, it becomes clear the MGA finds success by adopting a strategy centered around risk avoidance. In an industry of uncertainty and fluctuating hard and soft market cycles, an MGA operates under an umbrella of stability.

Topics Trends Carriers Agencies Underwriting Insurance Wholesale