MGAs Get Bad Rap; Experts See Them As Good E&O Risks

Managing general agents get a bad rap in the property-casualty insurance industry, but from the agents errors and omissions underwriting perspective, theyre pretty good risks, some experts say.

While others cringe at the prospect, Raymond Wahl, a 25-year participant in the agents E&O market, sees a market op-portunity in writing E&O for MGAs.

Mr. Wahl, whose past experience in-cludes stints at Executive Risk (now part of Chubb) and AIGs National Union, now works at a managing general agency as a senior vice president for West Hartford, Conn.based Lee & Mason Financial Ser-vices, which writes agents E&O on behalf of Liberty Insurance Underwriters.

We dont specialize in any particular segment of the agents E&O market, but have instead taken a broad approach, Mr. Wahl told National Underwriter, ex-plaining that opportunities change over time.

Right now, everyones decided they dont want to write MGAs again, which I happen to think are usually a good write, he added.

If you talk to some of the markets that dont want to do MGAs, usually you dont get a good reason, he said referring to a stigma thats existed since Sen. John Dingell highlighted the role of MGAs in some insurer failures in the 1980s.
Its not for any underwriting reason. I have never seen any evidence that an MGA is any worse of a risk than any other agent, he said. And I could make a strong argument that theyre a much better write than the average run-of-the-mill bro-ker, particularly the specialist MGA work-ing in only a couple of lines of business. People that have been doing the same lines of business for 30, 35 years know this stuff cold. Thats the kind of agent I want.

Speaking on the same topic at the in-ternational conference of the Minneapolis-based Professional Liability Underwriting Society International Conference in No-vember, Ross Herlands, chief underwriting officer of Business Risk Partners in Hart-ford, said that E&O underwriters shy away from wholesale brokers as well. But its not a bad time to write wholesalers or MGAs, he said. There are ways to separate the wheat from the chaff.

There are some very large wholesalers across the country that by definition are involved with very large deals, he said. Wholesalers that dont do monumental deals and have very specific knowledge of particular niches are in another world of risk entirely, he said.

On the MGA side, while there may still be some fallout from the loosey-goosey management styles of carriers from the soft market years, as they work to put con-trols in place and conduct more audits of MGAs they work with, now might be a good time to write the E&O, he said.

Several experts saw different potential exposures for MGAs and wholesaler bro-kers, extending the distinctions to retail agents and retail brokers as well.

Ken Schneider, vice president and di-rector of product development for Burns & Wilcox, a Farmington Hills, Mich.-based MGA and wholesaler, said that contractu-ally, an agent has more duties and respon-sibilities.

Im thinking of all the agreements that I have to sign as an MGA. All those con-tracts give us a higher duty of care because we have quoting and binding authority. All the broker has to do is collect a premium.

When you have binding authority, youre getting more like a companyand if you bind something outside the guidelines, its your fault. If that happens with a bro-ker, then thats the companys fault, he added.

Mr. Wahl pointed out that unlike bro-kers, MGAs that underwrite for a specific insurer dont promise to scour the mar-ketplace. Lee & Mason, for example, represents only Liberty Mutual. I do not hold myself as someone who is going to go out and get the best and broadest cover-age and therefore cant face a claim from an insured alleging that better coverage could have been obtained from another market. Given that probably 99 percent of claims come from the insured,I think I have much less chance of ever being dragged into a lawsuit than someone thats brokering to 10 or 12 markets.

But Eugene Mason, a senior vice presi-dent for Willis Re in Farmington, Conn., sees a downside for an MGA that repre-sents one insurer. If the [A.M. Best or S&P] rating for that insurer suddenly drops, the MGAs exposure automatically increases because it continues to place business with a company that could even-tually have solvency issues. (See related story, page 16 for different views on the E&O impact of solvency issues.)

Although MGAs and wholesalers have special problems, experts said market con-ditions are generally tight for all types of commercial lines producers.

The agents class seems to be harder than a lot of the rest of the E&O lines, Mr. Wahl said, noting that this is a depar-ture from past hard markets when agents E&O tracked other professional lines closely.

He said that several $20 million mar-kets moved out, chalking one exit up to a cultural change after a merger and another to the loss of reinsurance. There was just a series of events causing markets to leave, he explained.

With the market as hard as its been, we almost dont care who else is quoting. Our biggest problem has been keeping up with the flow, he commented, noting that there have been times when the submis-sion total reached 600 for a single month.
Mr. Wahl said he didnt foresee condi-tions getting worse for agents and that early signs of leveling are evident. Last year, he said renewal price changes his firm quoted were around 40 percent early in the year, falling to 30 percent by year end. He speculated that 20 percent increases were likely this year. While some insureds saw 200- and 300 percent hikes last year, they just had ridiculously low prices before, he said.

Mr. Mason said the agents E&O market experienced extremely soft pricing dur-ing the mid-1990s, noting that since most agents and brokers business is written at a low ($1 million) limits, primary companies dictate pricing. He said that so many pri-mary companies were competing against each other that some had to cope with ad-verse selection, ultimately prompting some carrier exits as good risks went to lower-priced markets.

While Mr. Mason said terms and condi-tions were tightened and multiyear policies eliminated over the last two years, renewal price hikes have only been in the 15-to-25 percent range. Unlike the 1980s hard market, this one has had an infusion of primary capacity. While new entrants ha-vent returned capacity to soft market lev-els, new capacity has made it difficult for insurers to price business at a level that will produce an underwriting profit, he said.

As for reinsurer appetites for the agents and brokers class, they have not necessar-ily changed during the hard market, ac-cording to Barbara Kolasinski, assistant vice president and E&O Product Specialist for GE ERC in Barrington, Ill. Ceding companies, she said, are taking a more dis-ciplined underwriting approach around higher-hazard classes of business and pay-ing more attention to follow-up procedures with agents clients.

At the same time, reinsurers are review-ing programs individuallylooking, for ex-ample, at areas of practice included in ce-dents acceptability guidelines.

Agents and brokers who specialize in aviation, ocean marine and professional li-ability, for example, might be viewed as tougher classes, she said, citing the spe-cialized and long-tail nature of exposures that increase the potential for greater claims severity in these areas.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 30, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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MGAs Get Bad Rap; Experts See Them As Good E&O Risks

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