Defining by definition
Published On : 05 Jun 2016
Pen's Chief Underwriting Officer, Martin Hall, reflects on the purpose and potential of MGAs.
This time last year, I was busy ruminating on my first few weeks working for a specialist underwriting business.
After 20-plus years squarely in the insurer and capacity provider camp, I'd made the transition and thought it would be helpful to document what had surprised, bemused and impressed me about the workings of the managing general agent's world.
Happily, it proved very much a case of positive revelations rather than disconcerting discoveries but that doesn't mean each and every insurer is a wholehearted backer of the MGA model. The model continues to have its staunch supporters and also its detractors and critics. The question is why?
Only recently I saw some criticism resurface in the press: the assertion that the 'hidden cost' of task duplication and double-checking that insurers need to carry out, coupled with the manpower required to keep these relationships running, eat away at the all-important profitability for capacity providers, which ultimately MGAs are there to deliver.
And do you know what? I agree. Not the fact that oversight is necessary but that, where duplication and overzealous double-checking are routinely carried out, these tasks clearly add an additional layer of cost.
The issue, therefore, lies in part with the very broad spectrum of what we mean by the term 'MGAs'. Being classed as a true MGA is very different to being a broker with delegated authority. To my mind, you need to exhibit all the same behaviours and capabilities of an insurer.
To be able to behave like an insurer, you first need to invest in many areas, including your own pricing capabilities, data interrogation and reserving expertise; you need good IT, risk and governance; you need your own sales and marketing function; and you need to be able to underwrite and handle claims with deep-rooted experience and expertise.
All of which go above and beyond the baseline triumvirate of MGA prerequisites a capital provider is prepared to pay for: to deliver sector and specialism knowledge they can't replicate; to deliver distribution they can't access elsewhere; and to deliver a positive return on capital margin they can't offer themselves.
Of course, not every capacity provider demands more than those three overriding objectives. The value of an MGA's distribution to many Lloyd's syndicates, for example, is always likely to be higher than to a multi-function mainstream insurer. Choosing the right partner as an MGA is an important decision.
In reality, the roles MGAs should be experienced in, proficient at and authorised to carry out all depend on your definition of an MGA. So the issue is also inextricably linked to trust. There is little point instructing a specialist underwriting operation to carry out key capabilities, if you don't then trust that organisation to deliver those core functions. You've got to buy into the model.
The need for greater clarity in definition is one of the reasons why we choose to describe our own strategic ambition as that of being a ‘virtual insurer', rather than the blanket term of MGA. The only difference is you don't carry the capital - and that's not easy, nor cheap, to provide. But it's essential if capacity providers, large and small, are going to trust you with theirs.