Episode Transcript
[00:00:00] Speaker A: Foreign.
[00:00:06] Speaker B: Welcome to Perspective First, a podcast series by A&M's financial services industry group where we speak with experts and thought leaders on the latest trends and hot topics within the financial services sector. I am your host, Chris Taylor, a director here in Alvarez and Marcel's insurance practice based out of the Chicago office.
And today's episode, we'll take a look at MGAs. An introduction. Joining me is David Carey, a director in our financial services practice. David, good to see you as always.
[00:00:39] Speaker A: Absolutely, Chris, thanks for having me on.
[00:00:41] Speaker B: And so David, one of the topics that keeps coming up we keep hearing a lot about in the insurance space is about these MGAs. Could you just start by describing what is an MGA?
[00:00:52] Speaker A: It's a fair question.
So MGA managing general agent, they're essentially an insurance intermediary that's been granted underwriting authority by the insurer.
So what this does, it allows the MGA to perform certain functions typically handled by the insurance company itself. So think binding coverage, underwriting and pricing risks, appointing agents and sometimes even handling claims.
They, they operate with significant degree of autonomy but but always acts on behalf and under the guidelines set by the insurer. They don't bear any of the insurance risk themselves that remains with the carrier. And it's interesting, you know, MGA's, the concept has been around for a long time with roots back to, you know, Lloyd's of London, although as you and I both know, they've gained a significant amount of traction recently, particularly in the US the exact number of MGA's, NGUs or other, you know, cover holders is challenging. I've yet to find a specific single comprehensive registry.
That said, you know, industry sources suggest that there are are upwards of roughly 3,000 operating across various lines of business. But this number typically fluctuates relatively frequently given the number of new entrance consolidations that we're seeing in the market.
In terms of, you know, sector, there are a few, but the most common are commercial and personal lines, property and casualty, life and health and reinsurance. So for pnc, think commercial auto, professional lines and workers comp. And then, you know, as you're more familiar, Chris, with life and health specialty programs, life insurance for niche demographics and even disability.
[00:02:35] Speaker B: Okay, so it's pretty robust in terms of where they are. You mentioned a little bit about how MGAs support carriers, how they work in terms of being able to do underwriting and some quoting. Can you talk a little bit more about how they support the insurance ecosystem, whether that be distributors or they work with carriers or they work with TPAs or other relevant parties.
[00:02:59] Speaker A: Absolutely, and it's a good question.
We're hearing a lot of that in the market recently.
I'd say there are three primary ways MDA support the insurance ecosystem. You know, first and foremost, it's all about specialized underwriting expertise.
So MGAs often possess, you know, deep niche specific underwriting knowledge that may not be readily available within all insurance carriers.
So this expertise allows them to accurately assess and price complex or unusual risks, opening up markets that might otherwise go underserved. They become the go to for specialized coverage.
Next, I would say market access.
Again, MGAs act as vital bridges to specific markets, geographies or even distribution channels that insurers might find challenging or costly.
MGA's had established networks and understand the nuances of those segments. So this allows carriers to expand their reach efficiently. Think of an MGA as a strong network of independent agents in rural areas.
They provide the carrier with access to demographics that they might otherwise not necessarily tap into.
And last I would say is through operational efficiencies and flexibility. So if you're an insurer and you outsource underwriting, policy administration or even claims management, that can streamline their operations and focus on more strategic initiatives. The variable cost structure and scalability are particularly valuable in dynamic market conditions.
For instance, a carrier might partner with an MGA to handle underwriting or administration of a new product line without needing to hire or train a large internal team immediately.
Of course, you know, there are additional ways MLAs add value to the insurance ecosystem such as product innovation or risk transfer capacity provisions. But, but those would be my top three.
[00:04:49] Speaker B: That's interesting because you mentioned, you know, some of the ability to outsource from a carrier, particularly to get into some of those niche markets and gain that specialized knowledge. That's also a similar feature we see with TPAs or third party administrators where you know, particularly from a claim standpoint or even benefits administration standpoint, we see carriers outsourcing some of those functions. But the interesting thing that we've seen, and even with some of the clients that we've been able to help here at Alvarez Marcel, is that you also see MGAs and TPAs working together where MGAs are outsourcing some of their non core functions. I might be dealing with claims, for example, to TPAs and more so focusing on the specialized knowledge that they have internal to themselves.
[00:05:38] Speaker A: Exactly.
[00:05:40] Speaker B: So David, you spoke a little bit about some of the trends that you're seeing.
Talk to us a little bit more about that. I know you, you recently wrote an article around some of the trends on MGAs. Could you tell us a little bit more about what you're seeing in the market?
[00:05:57] Speaker A: Absolutely. And the first thing that comes to mind is growth.
You know, whether it's brokerages, TPAs and now MGAs, there seems to be a lot of focus on and around MGAs related to growth.
You know, broadly speaking, looking back, this could be attributed to increasingly complex insurance products, the need for specialized underwriting expertise in certain sectors, the desire for insurers to access specific markets or geographies more efficiently without establishing a full, you know, branch operation.
More recently, there's been a huge resurgence in MGA formation driven by factors like technology advancements and the desire for nimbler, more focused insurance solutions. And I think it's that level of specialization and personalization needed by consumers and participants in the market that's really driving that growth of, of MGAs.
You mentioned the article that I, that I wrote, you know, and I think it was all about looking forward mga, MGU trends that could, that could shape the market.
Strategic partnerships, of course, right, between MGAs and insurtechs will become more prevalent. So insurtechs bring those innovative solutions like digital platforms, blockchain, IoT. Right. Which can transform aspects of the insurance value. Ch.
That's beneficial for NGAs. From a product innovation, CX and operational efficiency standpoint.
Regulation is something that is becoming more in focus to MGAs. I would say rules are tightening around data privacy solvency and governance.
Think of NYDFs, cybersecurity regulations, the California Consumer Privacy act, even abroad. Right. The GDPR, insolvency two in the EU.
So point being is that MGAs need to invest in compliance and risk management capabilities to adapt to those, I'd say evolving and maturing regulatory changes to avoid, you know, potential penalties.
And you know, it wouldn't be, you know, with a growing market, of course, we're not surprised to see private investors entering the space. So private equity firms are going to continue to invest private capital in the MGAs due to their high growth potential, profitability, low expense structure, high scalability.
So I would say influx of private capital is going to fuel M and A and consolidation.
I'm already seeing that well capitalized and mature MGAs are emerging, seeking to cover a wider range of products and continuously expand their market reach through a series of acquisitions and partnerships.
So what that does is, you know, when you have consolidation, M and A fueled by private equity investment, that means that smaller NGAs are going to feel the pressure to differentiate. Otherwise they Risk becoming a potential target.
[00:09:05] Speaker B: That's a good lot of great points there. You mentioned this before, you know, with all of the series of acquisitions and you know, relatively, it seems like a relatively hot M A market, right, for, for MGAs?
[00:09:18] Speaker A: Absolutely, absolutely. And that's something that's just been been picking up more recently. Again, you know, MGAs, you know, they're, they're compensated through commissions on the premiums they produce and you know, sometimes participate through profit sharing arrangements based on the underwriting performance of the business they write. And so kind of there's a clear connection pull through from revenue, revenue generation, gross written premium to kind of subsequent value creation and evaluation of those or, excuse me, valuation of those MGA's themselves.
[00:09:54] Speaker B: So just a question then on that, just in terms of incentives. So it sounds like, you know, if you're an mga, you're getting compensation based off of, you know, what you're able to kind of underwrite and distribute.
How then is an MGA staying disciplined from an underwriting standpoint or how are they aligning that underwriting discipline with the carrier to make sure that, you know, everyone's appropriately aligned? And for in the individual line space, if you're dealing with an agent or a general agent that's selling insurance, you know, their incentive is they want to try to sell as much new business as possible and then they just hope to retain it. And that's how their financial incentives align. Is there some other type of incentive that goes with an MGA to have very precise underwriting for whatever niche area they're in?
[00:10:46] Speaker A: You know, it's a really good question, Chris. And you know, I think that's something that private equity carriers and MGA should all be thinking about.
That demonstration of underwriting excellence in an increasingly complex risk environment.
You know, while while investors can be focused on premium growth, what's really important at the end of the day is demonstrating that underwriting excellence and MJ's must prioritize, improve their underwriting acumen. Right. Consistent profitability and low loss ratios are critical for attracting and retaining carriers, carrier partners and potential investors. But again, it's rooted in demonstrating that underwriting excellence and capability.
[00:11:34] Speaker B: Got it. And those KPIs, I'm sure will be critical to any MGA either as an acquisition target or as a potential partner for a go to market strategy.
So I know we're almost at the end of time, but one question that does stand out.
It seems as if there's the MGA space provides a significant opportunity to create value for everyone in the insurance ecosystem you've spoken a little bit around, they can stand out through having a unique niche, having great product specialization knowledge, being incredibly well disciplined from an underwriting standpoint. What are other ways for an MGA to stand out either in the market from an acquisition standpoint or even being able to be a valuable partner to a carrier or other NGA in this space.
[00:12:27] Speaker A: So Chris, it's a good question and it really is a two part question. You're asking about what an MGA can focus on from an acquisition standpoint. You know, I would say first and foremost what comes to mind is specialization in niche markets or specific lines of business.
Maintaining a strong record of profitability is crucial and then building strong relationships with insurance carriers and other partners that enhance the MGA's reputation and value. Again, it's, it's, it's an, it's an old market, it's an emerging market at the same time and it's a growing market. If we know anything about insurance, it's a tight network of individuals who work in this space. So maintaining your kind of reputation and those strong relationships are very important.
And then the second part was around how to be a valuable partner.
I would say again, access to new markets. Helping insurers and agents access new markets and customer segments by leveraging their networks that they otherwise couldn't tap into.
Walking currently enhancing product development. Again, collaboration with insurers and other partners to develop new and more innovative products can add significant value for NGAs and their strategic partners. So bringing in those like tailored, more niche solutions for differentiated customer needs.
[00:13:46] Speaker B: Excellent. No, that's fairly, that's really helpful and I know we've got some other guests in the pipeline that I think will be able to provide some additional perspective, but I do want to thank you David, for, for joining us today. Being able to provide really great introduction in terms of what an MGA is and some of the key, key parts of components of how they interact with the various partners in the insurance ecosystem. I also want to thank the audience for listening to us. Make sure that you subscribe to the podcast if you haven't already, and that way you can hear our next episode as we continue our discussion on MGA's in a particularly hot market and how we continue to serve them and work with them as a financial services industry group. Thank you and looking forward to speaking with you again soon.
