MGAs Often Perceived As Guilty Until Proven Innocent

"Systems are more important than ever," he added. "You have to be able to show that you're tracking the risk as well as doing a good job of accounting."

"The big thing is" being able to answer the question, "What is your competitive advantage; your hook? Why are people doing this business with you instead of your other 20 competitors?"

In addition, "you have to have strong financials," he said. "Companies never looked at an MGA's financials before. Reinsurers didn't. They assumed that the company did that." But now reinsurers are "very interested" in an MGAs financials, he said.

Demonstrating a willingness to take risk is also important, he said, noting that this could involve "everything from forming a captive to a commission slide."

Paul Goodwin, vice president and marketing manager for Princeton, N.J.-based American Reinsurance's Domestic Insurance Company Operations Specialty Group, agreed. Giving a reinsurers perspective, he said, "when we're looking at MGAs, were looking at the financial aspect."

An "attention-grabber" is having 'skin in the game,' meaning taking on a portion of the exposure themselves, "but the money has got to be there to assume the risk of a potential downward slide," he said.

"An initial plus is having some type of actuarial analysis–actuarial backup that the MGA or program administrator has gone out and sought and paid for," he advised. "That lends credibility" to the potential success of a program from a profitability standpoint, he said.

Doug Behnke, executive vice president of Overseas Partners US Re in Chicago, gave another reinsurer perspective to members of Kansas City, Mo.-based NAPSLO. He advised MGAs: "You are probably best served by dealing in those areas that you are familiar with and where you have some expertise. I think it's a little bit foolhardy to try to be everything to everyone in the marketplace."

"I believe you need to have a business plan that is thought through," he continued. The plan "should involve an analytical approach to the business" and it should address "how you are evaluating the risks that you would be underwriting" on an insurer's or reinsurers behalf.

"You should be able to treat the markets capital as if it were your own," he added. Beyond just having an analytical approach, that means "that you have the proper controls in place," and that you work a carrier on evaluation criteria to determine the "proper measures of how a program is going to be evaluated and how it's going to be monitored."

He noted that OPUS Re will "require" MGAs to have skin in the game. "They will have, in some fashion, to take risk along with the fronting carrier or we won't be doing the deal," he said.

Mr. Allen noted that reinsurance intermediaries have different appetites with respect to the size of a program. "How many reinsurers will it take to do this?" he asked, noting that most intermediaries wont tackle anything for less than $10 million unless there's a reason to do it.

Theyll also look for simplicity, he said. "The more homogeneous a program is, the easier it is to do something smaller," he noted.

When the NAPSLO sessions moderator, Christopher McGovern of All Risks Ltd. in Timonium, Md., asked what an acceptable loss ratio would be for an insurance underwriter reviewing an MGA program, Bob Cohen, senior vice president of sales and marketing for United National Insurance Company in Bala Cynwyd, Pa., responded with some simple mathematics.

While noting that the answer varies by class of business, he said, "there's only 100 cents in the dollar. The carriers going to pay X amount in commissions in a given line of business. The carriers going to project a loss ratio including loss adjustment expenses, and the carrier has internal expenses. If you add up those three components and its pushing 100 percent, the deals not going to happen. If the carrier wants a 10 point [profit] margin, and those add to 90, the deal may make sense."

Mr. Cohen also noted that the "ceding company can be a big factor in getting a deal done in the reinsurance marketplace."

"When we bring a deal to market, we've done a lot of the prescreening," he said, adding, however, that even though United National does careful screening, "the reinsurers want to get in there," dismissing the idea that reinsurance deals could be completed in 60 days.

"Some deals–you could give birth sooner," he said.

Reinsurers are going to "focus on Where have you been? Why is the deal coming to market?" he noted.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 6, 2002. Copyright 2002 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.