‘Essential’ MGAs, Other DUAEs Face Inflation, Staffing Pressures
Taking a deep dive into the world of managing general agents and other delegated underwriting authority enterprises, AM Best reports that premiums generated by DUAEs are climbing, and interest in MGA acquisitions remains high.
In a March 1, 2022, report titled, “Delegated Underwriting Authority Enterprises Gaining Market Traction,” AM Best analysts note that DUAEs have “become an essential part of the insurance ecosystem,” going on to describe market conditions that are tailwinds for ongoing growth.
AM Best analysts also note, however, that MGAs and other DUAEs like carriers and other insurance market participants face the headwinds of inflation and staffing pressures to growth going forward.
On the plus side, according to the report, hardening insurance rates in different segments of the US commercial lines market drove MGA-produced premium growth of almost 15% from 2017-2020, including year-over-year growth of 5.5%. While rate increases are stabilizing or decreasing, near-term momentum in commercial auto, general liability and cyber bode well for MGAs.
New capacity from fronting carriers is another positive factor for MGAs, the report says, noting that a lot of new insurance company startups have stepped into the market with fronting models over the last five years, following Markel Corp.’s 2017 acquisition of fronting carrier State National.
More generally, insurers struggling to innovate are benefiting from MGA relationships, the report suggests. “MGAs and the other types of DUAEs are far more entrepreneurial by nature. MGAs that have the capital resources to introduce and implement new technologies have a competitive advantage,” the report says.On the other hand, “insurance companies have at times struggled with incorporating technological advancements that best serve their business needs, and the financial investment for new technological tools can be a significant headwind — trial-and-error can be costly.”
When insurers find the right MGA partners and successfully integrate new technologies into their operations, they can expand their product and geographic capabilities, the report notes. “Insurers that have developed partnerships with DUAEs have been better able to diversify risks in line with their risk appetite.”
Still MGAs and other DUAEs face the headwinds of economic inflation and a talent crunch just like the rest of the industry.
DUAEs that do not have adequate staffing and lack a strong pipeline for new hires could face tough times if they lose key management or staff members, especially if there is not a good succession plan in place, the report says.
While also noting that efforts to retain top talent could inflate the expenses of “lean, newer DUAEs,” the report suggests that the depth and quality of talent entering the MGA/DUAE market may, in fact, be significantly better than the talent that entered at different times in the past, attributing this assessment to “some market observers,” without identifying them.
“The entrepreneurial MGA market has gained traction and proven to be formidable enough to attract underwriters with excellent track records from larger, well established insurers,” the report says.
Turning to inflation and the impact it could have on expenses, the report says DUAEs that find their profit margins squeezed may try to counter that by raising commissions and fees. Lower profits could also bring down contingent commission levels.
DUAEs with diversified fee and commission sources should fare better in withstanding the difficulties of inflationary trends, the report suggests. If expenses begin to grow faster than revenues, DUAEs may try to expand their product bases to stay on par with increasing expenses.
Premium Growth, Top MGAs
The report begins with some basic definitions, first noting that the broad term DUAE includes MGAs, managing general underwriters, coverholders, program administrators, program underwriters, underwriting agencies, direct authorizations and appointed representatives. It provides specific descriptions of each of these types of DUAEs and notes MGAs are the most common form in the US market.
The growing number of MGAs collaborating with insurers to write specialty business is helping to fuel the increase in premium generated by MGAs, the report says, going on to summarize figures from an analysis of Note 19 of P/C carriers’ annual statements.
NAIC reporting regulations for Note 19 require that companies disclose individual MGA premium data only for those MGAs whose premium constitutes more than 5% of the carrier’s policyholders’ surplus, the report notes, concluding that the $49.4 billion of MGA-generated direct premiums tallied from the notes is an understatement. Not only does the analysis exclude premium figures for smaller MGAs or individual programs that do not meet the 5% threshold, it excludes a considerable amount of premium written through MGAs by Lloyd’s syndicates.
In spite of these limitations, aggregate premiums for both MGAs that are affiliated with carriers and those that are unaffiliated demonstrate a growing US P/C MGA market overall.
For 2020, $30.6 billion of the $49.4 billion total came from affiliated MGAs, representing 62% of the total. Affiliated MGA premiums grew 6.4% over the four-year study period that began in 2017, but unaffiliated MGA premiums grew faster — jumping 32% to $18.8 billion in 2020 from $14.2 billion in 2017. The $18.8 billion figure represented 38% of all MGA premiums in 2020, compared to 33% in 2017.
Several charts and graphs in the report illustrate the premium changes and set forth direct written premium rankings for both types of MGAs.
The top five unaffiliated MGAs, according to AM Best are:
The report lists the Top 20 and identifies the individual insurers that wrote the premiums and listed these MGAs in their statutory blanks for each of the 20 US P/C unaffiliated MGAs.
According to the report, the top five carriers listing premiums meeting the NAIC statement requirement threshold that they wrote through one or more affiliated MGAs are:
Finally, the report lists the top 10 US MGAs overall, also ranking them by direct written premiums. The following six with more than $1 billion each are shown in the report:
Philadelphia Insurance reported $3.4 billion in direct premiums written through its affiliated MGA, Maguire Insurance Agency, while American Agri-Business Co. reported $2.1 billion through Rain and Hail.
The next four US insurers with affiliated MGAs on the top 10 list — Scottsdale Insurance Co. (Nationwide), ACE Property & Casualty Insurance Co. (Chubb Limited), Florida-domiciled personal property insurer Universal Property & Casualty, and American Strategic Insurance Corp. (Progressive) — each generated between $1.0 billion and $1.5 billion in premium.
AM Best said it identified 663 distinct MGAs from its review of Note 19 of insurers’ 2020 NAIC statements. The growing number of MGAs collaborating with insurers to write specialty business is helping to fuel the increase in US P/C premium generated by MGAs, the report said. In fact, AM Best identified 970 carrier-MGA relationships in 2020, up from 890 in 2019.
The report also describes ways in which DUAEs pivoted and embraced opportunities during the pandemic, charts the roles and responsibilities that carriers are granting to DUAEs, reviews the M&A landscape and discusses the use of MGAs in life and annuity businesses.