Insurers Reveal Strategies On MGA Programs

Mr. Oliver also articulated another major theme of insurer representatives who spoke to National Underwriter–that program managers need to have both expertise and a significant amount of resources dedicated to the programs they are offering to the insurer.

Referring to the program manager of a moving and storage program that Royal insures, he said, "that's all these folks do." Over the years, Royal has found that the most successful programs are "not a cut-out of an agent's book." If, instead, an MGA is fully dedicated to one specific niche customer group or industry, then "that drives their organization. That's what they're about," he said, suggesting that it also drives results.

Program managers also have "to have ownership of the results," he said.

Mr. Oliver was one of several insurers who defined "ownership of results" by an MGA or program manager as something other than being part of a profit-sharing arrangement or taking some risk.

"In general, they should be very interested in the results and should have good knowledge," he said. Noting that insurers are requesting more and better data from program managers, he said, "they should have some understanding of what that data means–and what things like development of accident year data are. Because a lot of things, quite honestly, come in and they just say its a 42 percent loss ratio and its really not."

Mr. Oliver and other insurer representatives said that some MGAs are rising to the task by putting actuaries on their staffs or contracting with actuaries to give the MGAs and their carriers a comfort level about program results.

Another major theme among insurers who remain in the program business market is what Mr. Donnell calls a "controllership culture."

"We spend a lot of time on evaluation or due diligence of our potential partners. Along with that, we set up some very clear expectations in terms of roles [and] financial expectations [and] monitor performance against them," he said.

Speakers at recent industry meetings have criticized outsourced models for insurers and reinsurers handling MGA program business, pointing out that such an approach figured in the unprofitable results of programs fronted by Legion Insurance Company (which is now in rehabilitation). But carriers like ERC are perfectly content with outsourcing significant functions to MGAs, as long as relationships between the partners are strong and controls are in place.

And "generally what we find is that the strong MGUs, the ones that have confidence in their results, that have confidence in their business processes, and have confidence in their expertise in the market that they're serving, have no problem with our requirements," Mr. Donnell said.

Many carriers also have size thresholds for programs theyll accept, with $5 million cited as a common figure among carriers who shared them with NU.

With that size threshold among its requirements, John Mahoney, president of Kempes in Scottsdale, said his company declines the vast majority of the proposals that come in the door. "The first reason is that many programs are newly created or there is such small volume that we don't have a credible way of determining how to price the business."

Noting that the companys due diligence process is heavily focused on analyzing the performance of the program for the preceding three-to-five years, he said that even MGAs with larger volumes that also comply with a "fairly extensive list of data requirements" might see their programs rejected. "Where there is adequate data, many programs may be tracking industry results which are significantly unprofitable. As a result, if we don't have a high degree of confidence in our potential for an underwriting profit, we turn those proposals down as well," he said.

"There's a lot of stuff coming out of the market now that is not profitable," Royals Mr. Oliver said. "The story is that in today's market they could get the price increases to make it profitable. We're not really interested in that stuff because it's predicated on what we think will happen."

Gary Tiepelman, senior vice president of underwriting for Scottsdale Insurance Company, who said his company isnt looking to add any MGA programs to its book, still offered some words of advice for MGAs shopping their programs.

Its important to give carriers as much lead time as possible to analyze a program proposal, he said. "And I really think it's important to be selective about who you approach on these things," he added. "It's similar to individual risks. If agents are out there shotgunning to everyone, theyre not likely to get much of a reaction or a response from anyone."

"Obviously you don't want to put all your eggs in one basket, but I would think it's important that [MGAs] approach a carrier with the fact that they have researched the company and they know that this is really a good fit–and they're not out there approaching everyone else," he added.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, June 17, 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.