The MGA business model has changed and has become more stable since the 1990s and early 2000s, when the market entered a period of volatility due to MGAs' association with the failures of multiple insurers, says a new report.
In its recent study, "Managing General Agents: A Look at the MGA Specialists" Conning, an investment-management company for the global insurance industry, says the 1990s and early 2000s saw the failure of companies—such as Mutual Risk, Frontier and Reliance—that operated through MGAs. In the years since, Conning says an improvement in risk-management practices has helped create a more stable MGA business model today that limits the "extent an MGA relationship can adversely affect an insurer's underwriting results."
Essentially, according to Conning, the changes have required MGAs to have some "skin in the game," tying a portion of the MGA's income to the quality of premium underwritten. One strategy has been a sliding-scale commission, while another has been the assumption of a portion of the premium by a captive formed by the MGA.
"An improvement in risk-management practices has been successful in helping insurers manage MGA relationships and reduce systemic risks," says Conning. The firm adds that the changes to the MGA business model "have better aligned the interests of insurers and MGAs."
Conning notes recent financial challenges experienced at insurers SPARTA, Tower Group and QBE, but says these cases appeared to be "isolated events" rather than a sign of future problems for insurers associated with MGAs.
In fact, Steve Webersen, director of research at Conning, says in a statement, "Our analysis of MGA insurers indicated that as a group they generated direct premium growth above the commercial property and casualty industry in 7 of the past 10 years and have also outperformed the commercial market in loss ratio."
Conning says about 9.7% of total commercial lines direct-written premium, or $25.7 billion, is sourced through MGAs, and the study indicates that total may be underestimating total premium. "MGAs have certain characteristics that are attractive to insurers as they enter specialty markets, such as the size of programs written, the number of programs offered, geographical focus and writing business on an admitted or non-admitted basis (or both)," says Conning. Larger global insurers and reinsurers tend to be most active in using MGAs.
Over the past 10 years, Conning says its MGA composite produced a combined ratio that was 6.7 points below the commercial-insurance industry on average. Conning attributes the lower volatility in part to a focus by these insurers on more frequency-driven lines of business with less exposure to catastrophe losses that took a heavy toll in 2005 and 2008.
Conning also compared the MGA composite to the excess and surplus lines market "based on our view that both industries focus on risks with similar characteristics.
The study says the E&S combined ratio was nine points better than the commercial-insurance industry since 1999, compared to 6.7 points better for the MGA composite. "This was driven by an average loss ratio 4.8 points and an average expense ratio 3.1 points below the commercial industry." the study says. "This compares to the MGA composite with a loss ratio 6.6 points and expense ratio 0.4 points below the commercial industry."
Conning indicates that the MGA market should be healthy going forward. Webersen says, "The long-term outlook appears favorable, as the MGA market appears well positioned to grow from current levels. MGAs willing to incorporate technology and data analytics into their product offering can enhance their value proposition to insurers and hold a competitive advantage over the long term."
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