The MGA: Innovation’s Royal Road?
Managing General Agents (MGAs) are not a new model of risk transfer, but they recently have become more widespread, particularly in the small business space.
Matthew Grant, executive director of data and analytics consulting firm Abernite, explains though MGAs have traditionally acted as a way for intermediaries to tap indirectly into specialty lines (by granting an MGA binding authority to underwrite risks using the insurers’ capital), the rise of insurtech has led to the emergence of a new form of MGA: the stepping stone.
One of the main characteristics that sets MGAs apart from traditional insurers is that though “the MGA still needs regulatory approval”, it “has a choice of options for getting up and running more quickly”. Unlike full-fledged insurers, a large amount of capital is not required for MGAs to underwrite risk compared to a prospective carrier—it just needs to find an insurer willing to provide the capacity, which is in itself not particularly difficult. Grant cites John Rowland, formerly of Guy Carpenter, to explain why that is. As Rowland said, “It’s difficult for insurance companies to grow premiums organically. Insurers value MGAs’ specialist product and geographic expertise and distribution, which gives the MGA the ability to underwrite opportunistically and take advantage of market conditions. Insurers are able to strategically grow and diversify with lower execution risk and costs.”
The (relative) ease of setting up an MGA is what allows them to become “stepping stones” for those who want a smoother entrance into the insurance industry. In comparison to other insurance companies, Grant explains, “MGAs may provide one of the best opportunities to build up a business that can be sold off in 10 years or less (timelines that are appealing to VCs).” Given the many startup MGAs that have emerged during the insurtech boom, including Coalition, Corvus, and many others, it is clear that MGAs are seen as a way to introduce a new product or service into the industry without the difficulty that would come with following a more traditional path.
The evolution of other traditional markets (travel, entertainment, brick and mortar shopping, etc.) shows us that technology tends to squeeze out those in the middle. However, Grant suggests the rise of MGAs may shift the market in the other direction: “Is the middle going to squeeze out those on the edges? On the one side, the placing broker is under threat of being replaced by direct-to-consumer offerings powered by detailed data and advanced analytics. On the other side, traditional providers of insurance capacity increasingly have to compete on price and security strength with the more highly-diversified global capital markets that can access the analytics that once only existed in-house at insurers. Meanwhile the agile MGA, with multi-million dollars of investment, is able to sniff out the best markets and the cheapest capital.”
While Grant believes it’s unlikely MGAs will become the dominant force in insurance, they are poised to evolve efficiently and “launch new and enhanced insurance propositions, tightly linked to excellent analytics and richer sources of data.” In a way, that is supported from their very structure: by their nature, MGAs are more nimble, and as startups they are less likely to be constrained by existing legacy systems and are free to build their own platforms from the ground up.
In today’s environment, (re)insurers are more than willing to provide MGAs the third-party capital needed to take on the risk, but some questions remain: as their underwriting models become more evolved, will MGAs begin to take on risk themselves and become full-stack insurers? Will these SMB-focused MGAs attempt to move upstream and take on larger or more complex risk? Or will we see a tipping point where MGAs start selling out and are folded into their larger, more traditional counterparts? Only time will tell…