Thinking outside of the box

MGAs deliver more than just specialty packages as they prepare for changing market

No one knows just how many managing general agencies (MGAs) operate in the United States, but the insurance industry couldn’t survive without them, says Scott Anderson, current president of the American Association of Managing General Agencies (AAMGA).

“I don’t think that the American insurance market can survive without the MGAs,” Anderson said. He thinks there are several reasons why.

Beyond commodities
There are products out there that the Progressive Insurance companies of the world can turn into commodities such as auto and homeowners insurance, he said. “Those are all products that can be put into a box, for the most part,” Anderson said.

But MGAs and their carrier partners deliver “out of the box” products for those often unusual or unique risks that simply will not fit anywhere else, he says.

“It may be a smaller product, so there’s not billions of dollars or hundreds of millions of dollars available to design that product. It may be a small product, where there’s a limited number. There are businesses out there where there are only 200 of them around the country,” he said.

That’s where the MGA market comes into play.

“They may be unique in that the MGA market is one alternative, and I think the primary alternative, to cover those (risks),” he said. “So, when you have unique smaller exposures, it’s the MGA that’s covering that because they fall off the radar of the bigger companies.”

MGA market size
Defining what an MGA is and how big MGAs’ market share is today is difficult, according to Bernie Heinze, executive director of the AAMGA, a national association of managing general agents and wholesalers. Heinze says none of his association’s members fit the definition of a managing general agent if using the definition provided by the National Association of Insurance Commission-ers.

But for AAMGA’s 81-year history, managing general agents act as “wholesalers to whom binding authority has been entrusted by use of an underwriting pen on various lines of business by various different markets.” Heinze says that AAMGA’s 299 members also are defined as having been in business as a managing general agent continuously for the prior five years. They must write a minimum of $5 million of annual written premium, and have binding authority contracts with three independent markets, one of which must be an admitted market.

In addition, members must also have three letters of recommendation from their peers in their state and sign a code of ethics statement each year they are a member.

In the United States, Heinze estimates there are about 500 MGAs in all, which might include retail agents acting as a wholesaler for a particular program. “It’s very, very difficult to define (the market share) in terms of numbers,” he noted.

While precisely defining an MGA is a challenge, tracking their growth is less so for Heinze, who claims that in the last 10 years there has been a precipitous rise in the number within his organization. While the last six years brought on a heightened degree of merger and acquisition activity in all areas of the industry, including MGAs, Heinze says, new MGAs have also helped keep up the growth.

“From a merger and acquisition standpoint, we’re finding that the MGA market is fairly stable,” Anderson added. “Yes, there are mergers and acquisitions occurring at a rate higher than we’ve seen them in the past, but at the same time, there are new MGAs being formed.”

In 2001 the AAMGA’s managing general agent wholesaler members wrote a combined $16.1 billion of annual written premium, according to Heinze. In 2004, those same members wrote $23.9 billion of annual written premium, and in 2005, that number declined slightly to $22.3 billion of annual written premium, partly due to a softer market. “And of that $22 billion that is presently being written, approximately $2.2 billion is being written in the Lloyd’s of London marketplace,” Heinze added. “So we represent just around 40 percent of the total written premium of Lloyd’s in North America,” he said.

Scott added that the London market remains a critical component when doing business as an MGA.

“London is an important part because it provides opportunities for many of our members that would not otherwise be available,” Anderson said. “Domestic carriers have a certain way of doing business and even the surplus lines industry can’t always provide the capacity or the aggregate needed for some of our members.”

Anderson said that Katrina illustrated a perfect example. “After Katrina, capacity and coastal either shrunk or got very pricey. And we all had to deal with that. But I think London provides that flexibility that it always has. … You can take unique risks and they will figure out a way to provide coverage.”.

“Our whole job is to respond to new opportunities and to gaps in the insurance industry and provide coverage for those who are unable to get coverage elsewhere,” he said. “There is a synergy that we develop with London that provides the ability to fill that gap.”

Branching out
Anderson likens the role of an MGA to a branch office of a carrier. “An MGA brings to the table a binding authority, the ability to bind coverage for that agent without going to the carrier,” he said. “So, they’re doing the underwriting and they can provide some more program type stuff. They’re kind of a full-service or a branch office of that carrier, if you will.”

The contractual responsibility given to MGAs by carriers doesn’t come without earned trust, and the ability to make a profit, Anderson says.

“I think there is an element of trust that needs to be built, or that the MGA needs to bring to prove to the carrier that they can trust that the MGA has the expertise and the knowledge to underwrite business and to take care of that business and to manage that book of business,” he said.

“They also have to prove that they can bring business in … There’s a cost of doing business with an additional market out there for them, an additional MGA or an additional agent. So you have to say, ‘We think we can write X amount of dollars with you, we think we can do it profitably, and here’s why,'” Anderson said.

Topics Carriers Agencies Excess Surplus Insurance Wholesale Market London