Thinking outside of the box

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.

Service differences

When it comes to service, there are many variables and differences among MGAs, according to Anderson. “It’s all over the map,” he said.

“I think one of the unique pieces about MGAs is that because we’re out there trying to provide those gaps, there’s not one way to do anything,” he said. “All of the service that the insured sees or that our agent sees, a lot of it is predicated on how we operate.”

Anderson said some MGAs outsource claims handling responsibilities, some do it in-house, and for some it depends on the line of insurance. “Some are growing in claims service, and some are outsourcing that back to the company or to a TPA,” he said.

“There are a multitude of ways that MGAs do business, he says. “We think we’re doing it the right way, but so does our neighbor, and he’s doing it completely different.”

While MGA operations vary greatly so do their technological solutions that each firm depends on.

“I think from the MGA standpoint we have to keep up with technology just like we see the carriers doing,” Anderson said. “We need to place the opportunity and create that path of least resistance to the agents just like anybody else does.”

Like any industry, Anderson says, if business is done the way it has always been done, “just like the dinosaurs, we will become extinct.” …Technology is an ongoing process that we all have to face.”

Education and the future

No one can predict the future, but there a few pressing issues that MGAs know will cause concern in the coming years. One of those issues is the need for new talent in the industry.

“Not many young people today say, ‘I’m interested in the insurance business so that’s what I want to school for and do,’ says Anderson. “There aren’t many of those, but there have never been many of those.”

“It probably is one of the top one or two priorities that MGAs have,” Heinze said. “We consistently hear and speak with our members about the challenges and opportunities of retaining quality personnel, training personnel, and attracting new people to the marketplace.”

Heinze said the AAMGA University, the professional educational component of the organization, provides one avenue to help with this industry-wide concern. With increasing frequency, the AAMGA University is taking its classes to the students in various cities across the country. “It’s much more efficient to send an instructor to someone’s agency, as opposed to sending a member agent or an employee to attend a 12 hour CE class. … There are ways in which we are trying to bring education and help insurance professionals be on the cutting edge of new processes,” he said.

In terms of recruiting newcomers to the professional, Heinze believes the industry has done a poor job of getting young people excited about the value and strength that insurance as a profession can bring.

Anderson says that when thinking about the future he challenges his colleagues to not think about this year, or even next year but to think about the next five or 10 years.

This year he helped create the AAMGA’s Project 2017, where members and non-members discuss what the future holds.

“We’re looking 10 years down the road as to where our marketplace will be and working our way back from there to figure out what more can we can offer,” Heinze said. “What way do we need to change our systems, our technology, our offerings, our consumer and customer care management, and the things we can do entrepreneurially to be prepared?”

That’s what AAMGA is asking of its members, Anderson added. “So we can prepare to make some changes.”

“We’re not trying to figure out what the market is going to be like in 2017, 100 percent,” Heinze added. “We’re just trying to figure out what is going to make the most amount of sense.”