Insurance MGAs: Opportunities and considerations for investors

Managing general agents (MGAs) is essential in the insurance distribution chain. Investors are better able to recognize opportunities if they understand how MGAs work.

After more than a decade of focusing on intermediaries in the insurance sector, particularly retail brokerages, private equity investors in the United States and Europe have shifted their focus to another compelling niche play: managing general agents (MGAs). In the past two years, private equity investment in MGAs has increased, making each transaction more competitive and driving valuations higher.

Investors have sought to comprehend the role of MGAs within the insurance ecosystem, how they differ from other insurance intermediaries such as retail brokers and wholesalers, and how MGAs compare to other ecosystem components as an investment opportunity. This article overviews MGAs and the prominent trends influencing their competitive dynamics.

What are MGAs?

MGAs are insurance intermediaries, but unlike retail and wholesale brokers, insurance partners frequently grant them binding authority. This enables them to quote security policies that adhere to the risk parameters stipulated by their insurer relationships. This characteristic distinguishes MGAs from other insurance brokers. MGAs frequently differentiate themselves by specializing in nonstandard, niche, or specialty insurance lines or having privileged access to specific consumer segments.

Function in the value chain

MGAs can play a crucial role in the insurance distribution value chain, often lying between other intermediaries such as retail or wholesale brokers and insurance companies and offering a unique value proposition to all parties.

Typically, MGAs have relationships with insurance carriers that concentrate on businesses and hazards that are more specialized. Thus, retail brokers can increase the number of insurance companies from which a client can obtain coverage. The expertise of MGAs in their specialized specializations aids brokers in structuring risks for insureds.

MGAs can also increase the efficiency of the value chain because they operate without the legacy placement platforms found in other sectors. MGAs typically have efficient operations because they generally are smaller, younger, and lack the operational complexities of insurance carriers. In addition, they may provide improved technology for policy management, quotation, or claims management, streamlining the binding and policy management processes.

MGAs provide expertise and sophistication in underwriting for specific lines of business, such as cyber risk, to insurance carriers. Insurers can leverage MGAs to enter new markets without having to build their infrastructure, which typically entails hiring an underwriting team, developing new pricing models, sourcing external data pertinent to specific risks, and incurring the new development costs associated with an in-house build. Some MGAs also manage insureds' loss-mitigation strategies and process claims.

43 percent of the top 100 P&C insurers in the United States, including seven of the top ten, have at least one MGA relationship through which they procure new premiums.1 However, premium amounts sourced through MGAs vary considerably. Some may utilize MGAs to source new business in the margins, which typically account for less than 5 percent of their premiums. Others employ a hybrid model, with some programs maintained by in-house underwriters and others by MGAs (usually 25 to 75 percent of total premiums). In addition, some insurance companies rely on MGAs for most of their distribution and underwriting. In this instance, the insurer functions solely as a capacity provider or, in the case of certain fronting insurers, as a liaison between reinsurers and MGAs.

When evaluating MGAs, investors must consider current industry trends:

Emerging hazards: MGAs can apply their specialized underwriting skills and market knowledge to emerging risks, one of their primary value propositions. Casinos on Native American reservations, cannabis, transactional liability insurance for minor transactions, and cyber risk are examples of these new risks. The increased frequency, severity, and ongoing hazards of cyberattacks have spawned a market for cyber insurance that is expanding rapidly. Within the next five years, the cyber-insurance market is projected to grow from approximately $6 billion in premiums to more than $20 billion. Consequently, many cyber-focused MGAs have emerged, promoting superior risk identification and mitigation. A second area where MGAs are becoming increasingly active in specialty coverage for personal lines. This improves MGA capacity supporters' underwriting quality, customer experience, and access to specialized risks. An illustration of this is pet insurance, where prominent brands in the United Kingdom and the United States use the MGA model.

Digital MGAs: In the past few years, digital MGAs have flourished and received significant venture capital funding. These typically target specific end consumers (small businesses and homeowners) and offer particular insurance lines, such as pet, auto, homeowners, and small-business insurance. Multiple digital MGAs have retained a portion of the risk on their balance sheets, typically through acquiring a partner insurer, allowing them to control a portion of the capacity they place. Still, many continue to form alliances with other insurance providers to retain flexibility, particularly in admitted lines.

MGAs provide private-equity investors access to a high-growth industry, exposure to balance sheet-free pockets of the insurance ecosystem, similarities with well-established private-equity insurance investments such as retail brokerage, and margin expansion through advanced analytics and technological innovation. However, many have already recognized the opportunity, generating fierce competition for high-quality assets. Therefore, investors must be confident in executing an ambitious value-creation strategy when approaching MGAs.