The ABCs of MGAs

What a difference a few years make. Just three or four years ago carriers were clamoring to add volume and premiums were dropping to attract new accounts. Clients did not seem to mind the 10-plus year “soft market.” In fact, selling on price was easy. Well, times have changed.

With rates going up 20 percent, 50 percent even over 100 percent, the soft market selling rules are no longer valid. For brokers, finding a solid carrier is becoming a challenge. For some risks, finding any carrier to place the risk is a challenge. In times like these, brokers need all the help they can get.

So, what is an agent or broker to do during these “hard market” times? It is best to first think like an insured. Usually, foregoing some or all insurance coverage is not an option. Business owners or managers are then weighing their options of renewing a policy “as is” with the higher premiums, changing coverage or may even assuming a larger deductible. For some large enough businesses, exploring self-insurance is a viable option. In any case, the role of an insurance broker is to educate and advise the client on their options.

The growth of “alternative markets” has been at a rapid and steady pace for the last 40 years. Program business that developed in the 1960s led to the growth in MGAs and wholesalers. MGAs experienced a couple of “boom and bust” periods in the 1970s and 1980s, especially during the “hard market” of the mid-1980s.

Other alternative markets could include captives, risk retention groups, purchasing groups or more exotic solutions, such as financing transactions like “ART’s” and catastrophe bonds. These techniques to transfer risk can be very effective in the right context, but they also require a certain level of expertise. Most agents and brokers are very familiar with the wholesale and excess & surplus lines markets, which are the staple of these “alternative markets.”

MGAs and wholesalers
In a “hard market” the wholesaler is often an important player and can even save the day. When properly used, the client benefits since the insured will have greater access to better products. It often works best when the wholesaler is treated as an extension of the retail agency’s marketing department and can act as a partner in risk placement. The agency benefits by keeping the account and adding to the bottom line.

E&S brokers, wholesalers, general agents (GA), managing general agents (MGAs), regardless of the name, all function to find coverage for difficult risks at the best terms and conditions that are currently available in the marketplace.

Services provided by MGAs will vary, but they typically include quoting, binding coverages, issuing policies and even handling of claims. They will have access to both admitted and non-admitted carriers and may even have underwriting authority.

When to use a MGA
The obvious time is when a standard market is not available to write a particular risk. However, if the account is unique and can fit into a program, the insured might receive better service through a specialist.

There are many advantages in dealing with a wholesaler. First, is their knowledge of the marketplace. Taking on difficult or unique risks is their job, so they have daily exposure to who is writing what risks and what is going on in the reinsurance market.

Since many of these firms specialize, they can also offer technical expertise that can assist in the sale of their products. The underwriters will have an in-depth understanding of coverages and can interpret policy terms and conditions. All this can help save the retail agent time and money.

Selecting a wholesaler
Which path to follow can be a critical decision when looking at the plethora of wholesalers. As with qualifying any market, the retail agent needs to be confident in the wholesale broker’s reputation, financial integrity, overall stability, and ability to deliver products and services.

First, look for firms that specialize in the type of accounts that you need to submit. Do they have a thorough understanding of the products that are needed? Is the MGA capable of explaining and interpreting the coverage and benefits of these products? Are they creative at developing solutions for the insured’s needs?

Once that is narrowed down, do some research on the wholesaler’s reputation. Ask other agents about their experience with the wholesaler. Find out a little about the history of the firm, who owns them and how long they have been in business. Do they have adequate E&O coverage for what they are doing? What are the limits? What is their deductible?

Next, find out which markets they represent. Will these markets be a benefit to the insured? Are these markets financially stable and what is their rating? How much business does the wholesaler write with these markets and what is their relationship? What is the MGA’s loss ratio with these markets?

How easy is the firm to do business with? Do they return telephone calls? How automated is the firm? What is their typical response time after a submission is made? Do they have more than one individual that can answer questions? Do they require an agency contract? If so, is it restrictive? Do they have volume requirements?

What is the MGA’s philosophy on marketing business? How are broker-of-record letters handled? How many markets are typically approached? If more than one retail agent submits the risk, how is it determined which agent receives the quote? What commission level do they normally pay? Is it negotiable? Do they charge brokerage fees?

Discuss the procedure for regulatory filing and surplus lines taxes. Is the tax included in the premium, is it a separate fee or does the agency pay for it?

How to use a MGA
Should more than one wholesaler be approached with a particular risk? For small and uncomplicated risks the answer is “no.” However, as the risk becomes more complicated and the need for creativity increases, it may be prudent to utilize more than one wholesaler.

Discretion is always important. If more than one wholesaler is approached on the same risk, ask each broker which markets they will be contacting. Let them know of the markets that have already been contacted in order to avoid any unnecessary duplication. Otherwise, there is always a chance that an insurance company underwriter might receive the same submission from more than one source. This could then lead the underwriter to feel that since the submission is being “shotgunned” they should not waste their time on it.

In the age of automation it is hard to believe that illegible and partially completed applications with no attachments regularly flood the MGAs on a daily basis. These supposedly professional insurance producers submit applications that lack the detail to describe the account properly. The key to earning the underwriter’s attention is the quality of a submission. Quality in workmanship will transcend into many other areas as well.

If there is a target premium, let the wholesaler know. This saves time for everyone and adds credibility to the retail agent. In general, it is best to let the underwriter know what it will take to get an order. However, if the MGA meets the required terms, they should be awarded the account. A great way to destroy a relationship is to have an underwriter meet or exceed a request and then not receive the order.

E&O coverage
Before any “alternative markets” are approached, it is imperative that the producers and owners understand the coverage on the retail agency’s E&O policy. This applies to those setting up captives as well as those accessing the E&S market. Activities outside of the norm might be excluded from coverage on a basic E&O policy.

The growth of activity with alternative markets is understandable and a professional insurance producer needs to have as many arrows in his or her quiver as possible. Now is the time to develop the relationships and skills that will serve the producer and their clients well for years to come.