How can MGAs flourish in today’s competitive marketplace?

Expert in this field

With market conditions set to remain soft and increasing competition for business, it’s no surprise that Managing General Agents (MGAs) continue to grow in popularity.  MGAs offer an attractive route to new markets for underwriters in the Lloyd’s and London Market, and access to new products and markets for regional brokers. However, with barriers to entry higher than ever before in terms of regulatory requirements and set up costs, we examine the infrastructure MGAs are going to need if they are to flourish in today’s competitive marketplace.

The trick is to concentrate on adding value through profitable underwriting and effective distribution – whilst ensuring the business is on a firm regulatory and operational footing.

The MGA world is complex and scrutiny is increasing

Today the MGA model is a fundamental aspect of underwriting in the London insurance market. Nearly £5bn in GWP is generated through MGAs alone, and 39% of Lloyd’s business is written under delegated authority.  However, if an MGA is to deliver the required value proposition to both the supporting carrier and the investor, it has to be able to maximise control over underwriting and profitability through the appropriate support infrastructure, which can be complex and expensive to provide.

One of the key challenges is managing the impact of increasing regulatory scrutiny, particularly in  light of the new conduct risk reporting requirements that came into force for Lloyd’s underwriting vehicles in January this year. It is expected that by 2017 the FCA could influence the extension of conduct risk reporting to all UK underwriting vehicles.   For MGAs entering the market for the first time, the requirements are especially onerous and many will need a “regulatory umbrella” to help support them through a credible entry to the market, and any subsequent FCA license application and submission to achieve Lloyd’s coverholder status.

The FCA is also turning its regulatory sights towards broker owned MGAs and appropriate segregation of duties, creating potential exposure for brokers utilising their own regulatory permission to set-up an MGA.

Maintaining control

Unsurprisingly, comprehensive support packages come at a price and many of the service models currently being offered to brokers, investors and underwriting teams demand a significant equity stake in return for provision of a route to market.  Sometimes underwriting teams are required to release up to 80-90% of their equity in the vehicle at the outset, ratcheting their equity back-up over a period of three to five years. In this type of model, many fail to hit the targets that would enable them to achieve majority control in the MGA vehicle.

In our view, such models stifle the entrepreneurial spirit of new entrants, which is why we believe there is room in the market for an alternative approach that can provide the necessary supporting support services for professional and well run businesses without requiring an equity stake.

Managing claims effectively

Once an MGA has navigated the significant regulatory and start up hurdles and has become operational, managing conduct risk and the associated delivery of a compliant reporting and worldwide claims management function is vital to both understanding and control of their portfolio, and to inform underwriting decisions.

Many MGAs seek support to deliver the required level of service by working with third party specialists that are able to offer a fully integrated claims management and handling service, which operates from the first loss notification through to the payment of the claim. Often this service can include helplines that are manned 24/7, and other specific services linked to the cover provided – for example motor cover where vehicle repair, and recovery services are required, or in a commercial book requiring a home emergency response mechanism.

Today, clients, intermediaries, insurers and investors often require access to real time claims data at a granular level.  Systems have to offer different levels of reporting information suited to the needs of each of the interested parties and MGAs and coverholders will need to ensure tight controls are implemented on the claims process and pay close attention that third party administrators supporting their business can provide the detailed level of reporting required by all stakeholders.

Complementary services

Given the onerous management load on MGAs, many choose to opt for a full ‘incubation’ service, which provides administrative support, launch and host services, access to underwriting and policy provision software, plus other back office services including the creation and management of bank and trust accounts. Where appropriate, such services can also be extended to include access to experienced and long-term investors willing to support an MGA with initial working capital costs.

Capacity providers backing MGAs are looking for credible, often specialist underwriters with effective distribution reach that can add value in deployment of the insurers’ capital. However, they need to back MGAs that have all their bases covered, as without the appropriate infrastructure, regulatory reporting systems and claims management in place, they are likely to find they have backed the wrong horse.

Cunningham Lindsey, supported by Ambant Underwriting Services have recently launched MGA Guardian – a one stop range of services designed specifically for MGAs.