Mitigating Risks by Outsourcing MGAs

Implementing appropriate mitigation measures can help reduce the risks associated with outsourcing to a third party.

FREMONT, CA: Insurance carriers enter into agency partnerships with non-affiliated third parties, such as Programme Administrators (PA), Managing General Agents (MGAs), or Managing General Underwriters (MGUs). These third parties often do not assume any underwriting risk, despite receiving underwriting submissions, issuing insurance quotations and policies, collecting premiums, reporting statutory requirements, and processing claims. MGAs are utilized by carriers to assume business in exchange for a portion of the premium written. It is not uncommon for MGAs to have a bad reputation due to certain of their employees abusing their position and authority over carrier finances control and remittance, misappropriating money, and creating unproductive contracts to increase commissions.

Most MGAs carry out their fundamental agency tasks highly professionally and take their obligations very seriously.

Compliance: Underwriting Authority Guidelines lay the groundwork for an insurer's book of business by defining the MGA's authority to accept, alter, or deny potential insureds. A major responsibility is establishing precise Guidelines and ensuring they are constantly followed. A big danger would be if the MGA bound the Carrier to risks outside their control, like restrictions, regions, business lines, and business classes. The Carrier may suffer severe reputational and financial consequences if the MGA disregards the Guidelines. If the MGA had written more business than reinsurance could cover, some or all of this business could have gone uninsured. The state's Department of Insurance may also impose fines for guidelines violations.

Communication: The MGA's Underwriting Production must correctly report to the Carrier to maintain a functional and successful business model between the parties. Due to its seriousness, the Carrier typically establishes a monthly deadline for submitting all underwriting results in the format it likes. Suppose this timeline is violated, including but not limited to irregular reporting frequency, incomplete and inaccurate data, receiving summary data, receiving data in a format other than the requested format, or consistently missing deadlines. In that case, the Carrier risks experiencing operational difficulties when handling claims, recording written premiums, setting up premium receivables, or performing any other production-dependent task. The danger of keeping a production population that needs to be more accurate will also be presented to the Carrier.

Risks: There are risks of paying production premiums to the Carrier incorrectly. Payments are due 30 or 45 days after the end of the month the business was written, according to the MGA's contract with the insurer. Premium payments can be made in two different ways: written or collected. Regardless of whether premiums have been received, an MGA must provide written payments. This indicates that in these situations, the MGA maintains the credit risk. When premiums are remitted on a collected basis, MGAs are only compelled to send payments once received.