With the property and casualty industry already mired in a sustained soft marketplace, the financial crisis has placed even more demands on insurance carriers to grow their top line.
While strong competition for market share has become even more intense, insurers remain mindful that growing their premium volumes in an indiscriminate manner is hardly the solution to the challenges that they face in their quest for profitability.
The soft marketplace, of course, creates downward pressures on premium pricing, so the cycle of growing revenues under these conditions inevitably causes poor financial results. However, many insurance carriers are turning to a managing general agent as a way of hedging their risk-taking efforts on a particular product line in the most cost-effective manner.
The MGA program business model is a pragmatic way for a carrier to attain a significant premium volume and underwriting profitability. The insurer that adopts this model has the opportunity to select particular lines of business it wishes to write, and then target a market segment or a number of geographically diverse markets which have traditionally yielded successful financial results.
Selecting an MGA with the right characteristics can lend to the program's sustained profitability.
While competing MGAs tend to trumpet their advantages in a nearly uniform fashion, a carrier should look for particular attributes in these organizations that will give them a clear advantage when entering a new product line or marketplace. The carrier's due diligence process, however, must go beyond the standard "interview and audit" practices generally employed when selecting a program manager.
The most profitable carriers are cognizant of the distinct advantages of retaining the services of an MGA with hometown know-how.
Some carriers are understandably impressed by the panache of a large, multiregional MGA facility that can regale their prospective partner with its impressive client list, its history of service to the insurer community, its past record of successes, and its ability to engage in efficient claims handling. While these factors are important, they alone will not bring the desired underwriting results to a new program.
Today's highly competitive environment requires MGAs to have a far greater depth of knowledge about the line of insurance that it writes for a carrier, along with special skills to handle claims from the program. The harsh realities of today's economic climate and the increase in insurance fraud behoove MGAs to be better equipped to evaluate individual risks and to handle program claims in a proactive manner.
In the insurance realm, community mores come into play and it is an ably run MGA with local expertise that can provide the carrier with the greatest opportunity to maintain a profitable program.
A successful MGA intimately knows the details of their subproducers' operations and the unique nature of the demographics and communities that they service.
A local MGA is more likely to successfully engage the services of a subproducer whose office can accommodate the specific needs of a community through language-based marketing and client communications. In turn, this subproducer is more likely to attract the most desirous business for the MGA and the carrier that will fit into the program's guidelines.
A MGA located in a contiguous area can supplement its technical monitoring of the subproducer's activities with frequent personal visits. By doing so, it can closely evaluate the subproducer's employees, their attention to detail, and the subproducer's approach to its general business practices.
There are numerous other advantages that can inure to a carrier by employing the services of a local MGA. This MGA is likely to employ underwriters who were born and bred in the community where their writings emanate from.
Such familiarity gives them a great advantage. Their knowledge can thwart rate evasion practices, and they tend to have a greater ability to identify misrepresentations that are made by applicants for insurance during the underwriting process.
The local MGA is also intimately familiar with local ordinances, regulations and the laws of the community. Its underwriters therefore have superior ability to procure the best possible risks for the carrier's portfolio.
Finally, it is the local MGA who is most likely to understand the distinction between the techniques used in general claim-handling practices and the nuanced methodologies that can lead to the mitigation or elimination of many over-exaggerated or even fraudulent claims that particularly arise in certain local communities.
Local MGA facilities recognize "red flags" that are indicative of fraud common to claims involving medical mills, illegal runners and "ambulance-chasing" lawyers who attempt to twist the rules of the system to bilk insurers.
Certainly, the small percentage of illicit professionals who engage in nefarious claims practices results in a huge cost for the insurance industry to bear, but MGAs who handle claims with the appropriate local knowledge at hand are likely to bring greater profitability to their programs. Their ability to successfully apply data-mining techniques to identify repeat abusers can ferret out a lion's share of fraud and abuse.
The local MGA is also likely to provide the carrier with a sustainable competitive advantage by readily adapting its operation to sudden changes in local laws or regulation.
Today, insurance regulatory agencies focus a great amount of their time and resources on market conduct examinations, and these exercises are carried out utilizing very specific local standards and with little room for error. There is a clear expectation on the part of the regulator that the MGA is handling the carrier's business in strict compliance with state and local rules.
Regional MGAs often approach these market conduct examinations from the perspective that as long as they engage in "gold standard" underwriting and claims procedures, they will pass muster with the state insurance regulator. While these practices are important, they are only considered a starting point in today's regulatory environment.
The insurance regulator has an expectation that the MGA is keenly aware of the precise interpretation of laws and insurance department regulations by local courts and administrative bodies, and those are the standards that it will enforce.
An MGA who only has a vague or general understanding of these requirements will fail their carrier and be deemed to be non-compliant. Local MGAs, however, are more likely to closely follow the current trends applicable to local insurance laws and regulations, and they are therefore more likely to protect their carrier client from regulatory violations.
Local MGAs possess the critical skills and knowledge base to maximize the opportunities for a carrier's profit on program business. While it is wise for a carrier to conduct its traditional operational due diligence when considering the retention of an MGA, it must also examine the MGA's familiarity with local practices, procedures and the environmental nuances that will impact the prospective program.
By doing so, the insurance carrier and the MGA can enter into a solid partnership that will be long lasting and financially successful.
Michael D. Jaffe is chair of National City Service Agency Inc., a general agent writing New York livery business for Delos Insurance Company.
Grace Meek is chief business officer at New York-based Delos Insurance Company
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