Navigating the Managing General Agency Agreement
Managing General Agents (MGAs)
The Complexity of Insurance Program Business
Carriers are increasingly turning to Managing General Agents (MGAs) as a source of new business within the property-casualty industry. Carriers may use MGA, Managing General Underwriter (MGU), or program business, but all three terms refer to a relationship between an insurance carrier and an insurance broker. In this article, we will use either MGA or program business.
An Overview of the MGA Relationship
Managing General Agent business can run the gamut from commercial trucking risks to emerging coverages for cannabis oils and medical marijuana. Carriers consider MGA relationships due to talent and infrastructure constraints that might prevent a carrier from managing a line of business in-house. Whether due to a lack of skilled underwriters in a particular area or the need for specialized claims handling, carriers may consider awarding binding authorities to agencies and brokerages with the skills needed to manage that line of business.
Ordinarily, the MGA has underwriting and policy issuance authority, but some MGAs also have claims-handling authority. The MGA also will market the business through its website and attendance at trade shows, provide policy maintenance and service and manage the premium submissions and payments to the carrier. The binding authority agreement – the contract between the insurer and the MGA – outlines the MGA’s responsibilities.
The Wholesale and Specialty Insurance Association (WSIA) is the trade organization representing members of the MGA insurance system, known as “wholesale insurance.” Over 800 member firms operate today in the organization, which provides education, recruitment, advocacy and support to the wholesale and specialty/surplus lines insurance industry. WSIA carefully vets its members prior to admission to ensure they will adhere to WSIA’s high service standards.
An Overview of Program Business
Program business represents approximately 10 percent of the commercial insurance premium volume, according to Conning, a global investment management firm working primarily with the insurance industry. According to Aon Benfield, MGAs produced $41.6 billion in premiums in 2015 and $42.4 billion in 2016. MGA business has “significantly outpaced overall P&C growth during a five-year period.” Excepting crop insurance, MGAs have “strongly outperformed the P&C markets in loss ratios,” according to Aon Benfield.
Growth in MGA business occurs primarily in general liability insurance. However, property, inland marine and umbrella coverage, along with motor liability and workers compensation, make up a great deal of MGA growth. Personal lines coverage comprises a much smaller percentage of program business.
This business, however, is not without perils. Insurers have faced significant losses in transit business and casualty as well as in run-off business from various notable failures. In reaction to some of these failures, the industry began to change MGA agreements to include sliding-scale commissions, increased audits and a closer alignment between insurer and MGAs.
MGA Distribution Model
While there have been some significant program failures, the industry remains committed to the MGA distribution model, and 2014 saw a great deal of expansion from Everest Re, Monarch and Validus. Mergers and acquisitions of MGAs are in high gear, with Arthur J. Gallagher, AmWins, a wholesale brokerage, and others acquiring several MGAs in 2013 – 2014.
The National Association of Insurance Commissioners (NAIC) Managing General Agents Act is a model act accepted by 49 states. The MGA Act outlines the qualifications and procedures for resident and non-resident producers who achieve Managing General Agent status. The Act delineates the licensing requirements, the duties of insurers, the right of authorities to examine the MGA, penalties and liabilities as well as rules and regulations MGAs must follow.
New York is the only state that has not adopted the NAIC model. According to one attorney who lectures frequently on regulatory practices, “New York has typically not enacted model laws as they believe theirs are equivalent or stronger.” The MGA Act is available here.
Risks Associated with MGA Business
One of the most important requirements of managing program business is to ensure all involved agents comply with the underwriting guidelines. The guidelines should describe the characteristics of a target risk.
Here are some examples of practices that can put the relationship between an MGA and the carrier in jeopardy.
- Failure to follow the carrier’s underwriting guidelines as set forth in the agreement
- Failure to attach appropriate policy language or endorsements required by the company
- Violating licensing laws in any state where you conduct business
- Allowing brokers to issue binders/endorsements/certificates of insurance in violation of the agreement
- Failure to follow state or company cancellation guidelines or to follow other state or federal surplus lines laws
- Failure to follow the agreement’s binding directions
- Failure to cancel as requested by insured or premium finance company
- Improperly cancelling or non-renewing policy
MGAs and Coverage Disputes
Coverage disputes in MGA business can be complex. While the program administrator is an independent contractor of the insurer, the MGA can expose the carrier to significant risks. Anywhere along the program chain, a mistake or inaction by one party can tie the carrier and the MGA to the error, even if they have done nothing wrong.
In one example of a misstep in MGA business, the MGA wrote a workers compensation policy for an insured. When the policy came up for renewal, the retailer provided a timely quote to the insured. However, the insured’s risk manager advised the retail agent that she had to speak to the owner of the company, who was out of town.
The MGA sent a notice of non-renewal, but the insured claimed she did not receive that notice. Ten days after the policy expired, the insured called the retail agent to renew. However, a fatality and another loss had occurred during that ten-day period. The MGA held firm on its refusal to renew. The insured sued the retail broker and the MGA for failure to provide proper coverage. In the ensuing litigation, the court in its summary judgment ordered the MGA to provide coverage until the time the insured could place coverage elsewhere and to pay the claims for the fatality and another loss that occurred during that period. Mistakes made by any party in the distribution chain can be problematic for the MGA and the carrier.
The Benefits of MGA Relationships
The benefits for insurers to do business with MGAs are numerous. For larger carriers like Zurich, which is very active in program business, entering emerging markets like cannabis coverage or active shooter coverage would be cumbersome. In a smaller organization with the correct infrastructure and management team in place, an MGA can move quickly to take advantage of these rapidly expanding markets.
MGAs that have been in business for a time have extensive databases of retail agents they can use to market a new program. As long as the carrier is confident in the MGA’s record of accomplishment with other lines of business, an insurer can quickly deploy a new program for maximum profitability. Experts in MGA management report that while many MGAs write nationally, many insurers prefer to develop relationships with MGAs on a local basis when that MGA has a strong reputation and a deep retail network.
Additionally, despite the recent focus on underwriting automation, it is extremely difficult to automate the underwriting of specialty risks, which still requires “judgment underwriting.” Therefore, experts predict that MGAs will remain a vital and profitable part of the insurance marketplace.
The Complex Nature of MGA Agreements and Performance
MGA relationships can be complex. The structure of the compensation agreement between the insurer and the MGA is important. Many insurers do not require the MGA team to contribute financially, or have “skin in the game,” which has contributed to past program failures. The MGA receives roughly 12 to 15 percent commission regardless of the program’s profitability. This may incentivize members of the managing team to write business without a thorough underwriting analysis.
MGAs should be aware of cases where they receive a portion of the reinsurance profit contingent in addition to the basic commission. Depending on how carriers arrange the reinsurance contingent commission, the MGA can receive large commission checks in the early years before losses mature only to be stuck later with long-term losses and reinsurance commission debits as loss costs develop.
From the start, both parties to the MGA agreement must structure the right deal with the best incentives. Contract or underwriting mistakes can put a binding authority at risk or lead to errors and omissions claims. Robert Anderson and The Anderson Edge has decades long experience in negotiating and performing as an MGA for multiple carriers. It can assist counsel in unraveling the multi-level insurance transactions that are characteristic of the MGA structure.
1 Carrier, Benoit (2014). MGAs: How They Work, Industry Results, Market Trends. [PowerPoint slides]. Retrieved from https://www.casact.org/community/affiliates/MAF/1017/MGA.pdf.
5 Karlinsky, F.E. (2013). Managing General Agents: Overview of U.S. Regulation [PowerPoint slides]. Retrieved from http://www.imc-seminars.com/uploads/papers/MGA%20USA%20Regulation%20-%20Fred%20Karlinsky.pdf.