While there’s a bright future for managing general agents that “get it right,” Grahame Chilton, CEO of Gallagher UK, warns against tolerating the few rogue MGAs who could ruin the reputation of the entire sector.
Chilton, who will be stepping down from his role at Gallagher to rejoin Capsicum Re later in the year, said he is deeply concerned about anything that causes “customer detriment,” which could be the result of the actions of just one rogue MGA.
These rogue operators can call into question the professional behavior of the many excellent MGAs that operate in the business today, although in many instances these MGAs underwrite to a far greater standard than some insurers, he affirmed.
As a result, he added, “we all have a role to play” to “question and call out the worst exponents” in the business.
Chilton discussed the MGAs — their fatal flaws and successes — in a speech at the annual meeting of the Managing General Agents’ Association (MGAA) in London last week.
Chilton speaks from experience about the damage inflicted by rogue MGAs, having witnessed the messy aftermath of one of the biggest MGA failures – that of North Carolina-based Fortress Re.
As a reinsurance MGA, Fortress Re not only led the general aviation market, it also led the aviation retro market and property retro market. “In fact, post Hurricane Andrew, they probably accounted for 35-40 percent of the market’s [retro] capacity, which kept many of the professional reinsurers at that time going,” recalled Chilton.
Fortress Re wrote over a half a billion dollars of retrocessional premium until Sept. 11 when it never underwrote another risk. (All four planes that crashed that day were reinsured into the Fortress Re risk pool, which didn’t have enough money to pay several billion dollars in claims.)
Chilton said 9/11 marked the beginning of the end of reinsurance and retro MGA pools.
Long before the company’s demise, Chilton noted that he had an opportunity to read through Fortress Re’s underwriting agreement. “To this day, I have never seen anything so wide. It was a three-paragraphed letter, signed by the four Japanese companies they were underwriting on behalf of,” he affirmed. “Basically, it said that they could write any class of business, whether insurance or reinsurance, up to any limit and any exposure and that they could also buy reinsurance on behalf of the company.”
Chilton recalled another example of MGAs’ lack of professional rigor, which also could have caused some customer detriment. About 10-15 years ago, he worked with some smaller MGAs, and he said he “quickly realized that as a broker, I knew more about the client, more about the risk, and how to price it, with my own actuaries that I employed [at Benfield] than did the MGAs. The insurers were giving their capital to MGAs who didn’t have any actuarial pricing capabilities. It was extraordinary.”
He questioned what carriers are getting from doing business with rogue MGAs. “All I can see in that relationship is headaches and sleepless nights. And I know many of you, as members of [the MGAA], will want to see that professionalism is brought into all of the MGAs, many of which are members here. We all know where they are.”
Chilton said he is constantly surprised how some MGAs are given the authorization to replicate problems they’ve caused many times before.
“We’ve got to make sure these people are found out. It’s all of your futures. I’m an old fart, so it’s not my future, it’s your future. And so where you’re sitting, you need to call this behavior out,” he said.
“Whether it’s an insurer or an MGA, any form of reckless underwriting with no capital or minimum capital, and the absence of regulatory oversight, it can’t be accepted. It cannot be accepted in today’s market by ethical customer centric brokers. So brokers will look more and more at the agreements and the performance of the MGAs that they [use for clients].”
Getting It Right
So how can an MGA get it right and avoid customer detriment?
“Getting it right means achieving the right combination of governance, customer centricity and specialist offering, all delivered to exacting underwriting standards with pricing and actuarial support allied with seamless systems and an acceptable cost base. That, in my mind, is the formula for the successful MGA of the future,” he said.
He suggested the key success for many MGAs is to find a niche in specialty and non-standard lines. There are some “standout examples” of successes in specialty areas such as small rural motor business, cyber terrorism and specialist household businesses, he said.
“I’m proud that we have those specialisms in the MGAs in this country [referring to the UK]. I think it’s a really vibrant part of the industry,” Chilton said, noting that some of these companies have the most professional distribution and underwriting of any of their competitors.
These MGAs have a lower cost base than many insurers, specialist expertise and strong relationships with coverholders, while being more fleet of foot and responsive in their underwriting capabilities, Chilton affirmed.
MGAs as Virtual Insurers
Increasingly, MGAs are becoming more like virtual insurers, which is the best way forward for the industry, he stressed. In other words, these MGAs are underwriting as if the capital was their own.
“They should ensure that there is first class actuarial work going on, that they understand the commitment they’re making to the paper,” Chilton continued.
“I would ask you on behalf of the broking community to ensure that you know your clients are going to get their claims paid because you’ve done the actuarial analysis and the right reserving,” he said. “You know your insurers are going to stand behind you because you’ve done a professional job. I think then, if we can do that, I think there’s a very, very good future for further proliferation of MGAs…”
Chilton predicted that only the true virtual-insurer MGAs, which deliver great technology, professional specialist underwriting services at a low-cost basis, will survive and thrive over the long term. “I believe, for many of the … virtual insurer MGAs I see today, that there’s a bright and exciting future.”
Chilton said robust regulation is key and he expects regulation to tighten in the MGA space – from large companies to small.
“I think it’s the responsibility of all of us to ensure that all MGAs have a robust risk-governance framework with a delineation of responsibilities and to be able to demonstrate always that they’re serving the best interest of all their stakeholders,” he said.
Chilton acknowledged that increasing regulation is “an unfortunate part of the business that isn’t going to go away. We’ve seen it in the broking community, we’ve seen it in the underwriting community. We’ve seen it in the MGA community.”
The reason the industry needs more compliance and regulation is because “as an industry we haven’t done it very well ourselves. So the way to get the cost out of this, is to take it seriously, run your businesses and treat people as you hope to be treated yourself. And call out the rogues cause they’re the ones that are pushing up the compliance cost in your businesses.”
He concluded by saying that it’s an exciting time to be an MGA. “The critical role you play for brokers and carriers creates a bright future for those that get it right.”
Getting it right, he repeated, means robust management and governance – no successful business is badly run. In addition, a successful MGA needs value-added services, special capabilities and strong, healthy long-term capacity. “Get that right, and you will really crack it.”
Grahame “Chily” Chilton founded and was CEO of the Benfield Group, purchased by Aon in 2008. He subsequently became chairman of Aon Benfield. In 2012, Chilton left Aon Benfield and in 2013 formed Capsicum Reinsurance Brokers with Rupert Swallow, to work in partnership with Arthur J. Gallagher as its primary treaty reinsurance broking outlet. Chilton joined Gallagher in February 2015 as CEO of its UK-based brokerage and underwriting division. He rejoins Capsicum Re later this year.
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